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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31 , 2020
Commission file number: 1-11302
KeyCorp
key-20201231_g1.jpg
Exact name of registrant as specified in its charter:
Ohio 34-6542451
State or other jurisdiction of incorporation or organization: I.R.S. Employer Identification Number:
127 Public Square, Cleveland, Ohio 44114-1306
Address of principal executive offices: Zip Code:
( 216 ) 689-3000
Registrant’s telephone number, including area code:

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Shares, $1 par value
KEY
New York Stock Exchange
Depositary Shares (each representing a 1/40th interest in a share of Fixed-to-Floating Rate
KEY PrI
New York Stock Exchange
Perpetual Non-Cumulative Preferred Stock, Series E)
Depositary Shares (each representing a 1/40th interest in a share of Fixed Rate Perpetual Non-
KEY PrJ
New York Stock Exchange
Cumulative Preferred Stock, Series F)
Depositary Shares (each representing a 1/40th interest in a share of Fixed Rate Perpetual Non-
KEY PrK
New York Stock Exchange
Cumulative Preferred Stock, Series G)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒ Accelerated filer ☐ Non-accelerated filer ☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicated by check mark whether the registrant has filed a report on and attestation of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of voting stock held by nonaffiliates of the Registrant was $ 11,887,028,662 (based on the June 30, 2020, closing price of KeyCorp Common Shares of $12.18 as reported on the New York Stock Exchange). As of February 17, 2021, there were 968,815,152 Common Shares outstanding.
Certain specifically designated portions of KeyCorp’s definitive Proxy Statement for its 2021 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.


Forward-looking Statements

From time to time, we have made or will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements do not relate strictly to historical or current facts. Forward-looking statements usually can be identified by the use of words such as “goal,” “objective,” “plan,” “expect,” “assume,” “anticipate,” “intend,” “project,” “believe,” “estimate,” or other words of similar meaning. Forward-looking statements provide our current expectations or forecasts of future events, circumstances, results or aspirations. Our disclosures in this report contain forward-looking statements. We may also make forward-looking statements in other documents filed with or furnished to the SEC. In addition, we may make forward-looking statements orally to analysts, investors, representatives of the media and others.
Forward-looking statements, by their nature, are subject to assumptions, risks, and uncertainties, many of which are outside of our control. Our actual results may differ materially from those set forth in our forward-looking statements. There is no assurance that any list of risks and uncertainties or risk factors is complete. Factors that could cause our actual results to differ from those described in forward-looking statements include, but are not limited to:

• our concentrated credit exposure in commercial and industrial loans;
• deterioration of commercial real estate market fundamentals;
• defaults by our loan counterparties or clients;
• adverse changes in credit quality trends;
• declining asset prices;
• deterioration of asset quality and an increase in credit losses due to the COVID-19 global pandemic;
• the decline in oil prices;
• the extensive regulation of the U.S. financial services industry;
• changes in accounting policies, standards, and interpretations;
• operational or risk management failures by us or critical third parties;
• breaches of security or failures of our technology systems due to technological or other factors and cybersecurity threats;
• negative outcomes from claims or litigation;
• failure or circumvention of our controls and procedures;
• the occurrence of natural or man-made disasters, global pandemics, conflicts, or terrorist attacks, or other adverse external events;
• increased operational risks resulting from the COVID-19 global pandemic;
• our participation in the Paycheck Protection Program;
• evolving capital and liquidity standards under applicable regulatory rules;
• disruption of the U.S. financial system;
• our ability to receive dividends from our subsidiaries, including KeyBank;
• unanticipated changes in our liquidity position, including but not limited to, changes in our access to or the cost of funding and our ability to secure alternative funding sources;
• downgrades in our credit ratings or those of KeyBank;
• uncertainty in markets due to the COVID-19 global pandemic;
• a worsening of the U.S. economy due to financial, political or other shocks;
• our ability to anticipate interest rate changes and manage interest rate risk;
• uncertainty surrounding the transition from LIBOR to an alternate reference rate;
• deterioration of economic conditions in the geographic regions where we operate;
• the soundness of other financial institutions;
• economic disruption related to interest rate risk and market risk due to the COVID-19 global pandemic;
• our ability to attract and retain talented executives and employees and to manage our reputational risks;
• our ability to timely and effectively implement our strategic initiatives;
• increased competitive pressure;
• our ability to adapt our products and services to industry standards and consumer preferences;
• unanticipated adverse effects of strategic partnerships or acquisitions and dispositions of assets or businesses; and
• our ability to develop and effectively use the quantitative models we rely upon in our business planning.

Any forward-looking statements made by us or on our behalf speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement to reflect the impact of subsequent events or circumstances. Before making an investment decision, you should carefully consider all risks and uncertainties disclosed in our SEC filings, including this report on Form 10-K and our subsequent reports on Forms 10-Q and 8-K
2

and our registration statements under the Securities Act of 1933, as amended, all of which are or will upon filing be accessible on the SEC’s website at www.sec.gov and on our website at www.key.com/ir.

Terminology

Throughout this discussion, references to “Key,” “we,” “our,” “us,” and similar terms refer to the consolidated entity consisting of KeyCorp and its subsidiaries. “KeyCorp” refers solely to the parent holding company, and “KeyBank” refers solely to KeyCorp’s subsidiary bank, KeyBank National Association. “KeyBank (consolidated)” refers to the consolidated entity consisting of KeyBank and its subsidiaries.

We want to explain some industry-specific terms at the outset so you can better understand the discussion that follows.

• We use the phrase continuing operations in this document to mean all of our businesses other than our government-guaranteed and private education lending business. The government-guaranteed and private education lending business and Austin have been accounted for as discontinued operations since 2009.
• We engage in capital markets activities primarily through business conducted by our Commercial Bank segment . These activities encompass a variety of products and services. Among other things, we trade securities as a dealer, enter into derivative contracts (both to accommodate clients’ financing needs and to mitigate certain risks), and conduct transactions in foreign currencies (both to accommodate clients’ needs and to benefit from fluctuations in exchange rates).
• For regulatory purposes, capital is divided into two classes. Federal regulations currently prescribe that at least one-half of a bank or BHC’s total risk-based capital must qualify as Tier 1 capital . Both total and Tier 1 capital serve as bases for several measures of capital adequacy, which is an important indicator of financial stability and condition. Banking regulators evaluate a component of Tier 1 capital, known as Common Equity Tier 1 , under the Regulatory Capital Rules . The “Capital” section of this report under the heading “Capital adequacy” provides more information on total capital, Tier 1 capital, and the Regulatory Capital Rules, including Common Equity Tier 1, and describes how these measures are calculated.

3

The acronyms and abbreviations identified below are used in the Notes to Consolidated Financial Statements as well as in the Management’s Discussion and Analysis of Financial Condition and Results of Operations. You may find it helpful to refer back to this page as you read this report.
ABO: Accumulated benefit obligation.
ALCO: Asset/Liability Management Committee.
ALLL: Allowance for loan and lease losses.
A/LM: Asset/liability management.
AML: Anti-money laundering.
AOCI: Accumulated other comprehensive income (loss).
APBO: Accumulated postretirement benefit obligation.
ARRC: Alternative Reference Rates Committee.
ASC: Accounting Standards Codification.
ASU: Accounting Standards Update.
ATMs: Automated teller machines.
Austin: Austin Capital Management, Ltd.
BSA: Bank Secrecy Act.
BHCA: Bank Holding Company Act of 1956, as amended.
BHCs: Bank holding companies.
Board: KeyCorp Board of Directors.
CAPM: Capital Asset Pricing Model.
CCAR: Comprehensive Capital Analysis and Review.
Cain Brothers: Cain Brothers & Company, LLC.
CECL: Current Expected Credit Losses.
CFPB: Consumer Financial Protection Bureau, also known as the Bureau of Consumer Financial Protection.
CFTC: Commodities Futures Trading Commission.
CMBS: Commercial mortgage-backed securities.
CMO: Collateralized mortgage obligation.
Common Shares: KeyCorp common shares, $1 par value.
CVA: Credit Valuation Adjustment.
DCF: Discounted cash flow.
DIF: Deposit Insurance Fund of the FDIC.
Dodd-Frank Act: Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010.
EAD: Exposure at default.
EBITDA: Earnings before interest, taxes, depreciation, and
amortization.
EPS: Earnings per share.
ERISA: Employee Retirement Income Security Act of 1974.
ERM: Enterprise risk management.
EVE: Economic value of equity.
FASB: Financial Accounting Standards Board.
FDIA: Federal Deposit Insurance Act, as amended.
FDIC: Federal Deposit Insurance Corporation.
Federal Reserve: Board of Governors of the Federal Reserve
System.
FHLB: Federal Home Loan Bank of Cincinnati.
FHLMC: Federal Home Loan Mortgage Corporation.
FICO: Fair Isaac Corporation.
FINRA: Financial Industry Regulatory Authority.
First Niagara: First Niagara Financial Group, Inc.
FNMA: Federal National Mortgage Association.
FSOC: Financial Stability Oversight Council.

FVA: Fair value of employee benefit plan assets.
GAAP: U.S. generally accepted accounting principles.
GNMA: Government National Mortgage Association.
HelloWallet: HelloWallet, LLC.
HTC: Historic tax credit.
IRS: Internal Revenue Service.
ISDA: International Swaps and Derivatives Association.
KBCM: KeyBanc Capital Markets, Inc.
KCC: Key Capital Corporation.
KCDC: Key Community Development Corporation.
KEF: Key Equipment Finance.
KIBS: Key Insurance & Benefits Services, Inc.
LCR: Liquidity coverage ratio.
LGD: Loss given default.
LIBOR: London Interbank Offered Rate.
LIHTC: Low-income housing tax credit.
LTV: Loan-to-value.
Moody’s: Moody’s Investor Services, Inc.
MRM: Market Risk Management group.
MRC: Market Risk Committee.
N/A: Not applicable.
Nasdaq: The Nasdaq Stock Market LLC.
NAV: Net asset value.
NFA: National Futures Association.
N/M: Not meaningful.
NMTC: New market tax credit.
NOW: Negotiable Order of Withdrawal.
NPR: Notice of proposed rulemaking.
NYSE: New York Stock Exchange.
OCC: Office of the Comptroller of the Currency.
OCI: Other comprehensive income (loss).
OREO: Other real estate owned.
PBO: Projected benefit obligation.
PCCR: Purchased credit card relationship.
PCD: Purchased credit deteriorated.
PD: Probability of default.
PPP: Paycheck Protection Program.
S&P: Standard and Poor’s Ratings Services, a Division of The McGraw-Hill Companies, Inc.
SEC: U.S. Securities & Exchange Commission.
SIFIs: Systemically important financial institutions, including large, interconnected BHCs and nonbank financial companies designated by FSOC for supervision by the Federal Reserve.
SOFR: Secured Overnight Financing Rate.
TCJ Act: Tax Cuts and Jobs Act.
TDR: Troubled debt restructuring.
TE: Taxable-equivalent.
U.S. Treasury: United States Department of the Treasury.
VaR: Value at risk.
VEBA: Voluntary Employee Beneficiary Association.
VIE: Variable interest entity.

4

KEYCORP
2020 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Item
Number
Page
Number
PART I
1
1A
1B
2
3
4
PART II
5
6
7
7A
8
9
9A
9B
PART III
10
11
12
13
14
PART IV
15
16
5

PART I
ITEM 1. BUSINESS

Overview

KeyCorp, organized in 1958 under the laws of the State of Ohio, is headquartered in Cleveland, Ohio. We are a BHC under the BHCA and one of the nation’s largest bank-based financial services companies, with consolidated total assets of approximately $170.3 billion at December 31, 2020. KeyCorp is the parent holding company for KeyBank National Association, its principal subsidiary, through which most of our banking services are provided. Through KeyBank and certain other subsidiaries, we provide a wide range of retail and commercial banking, commercial leasing, investment management, consumer finance, student loan refinancing, commercial mortgage servicing and special servicing, and investment banking products and services to individual, corporate, and institutional clients through two major business segments: Consumer Bank and Commercial Bank.

As of December 31, 2020, these services were provided across the country through KeyBank’s 1,073 full-service retail banking branches and a network of 1,386 ATMs in 15 states, as well as additional offices, online and mobile banking capabilities, and a telephone banking call center. Additional information pertaining to our two business segments is included in the “Business Segment Results” section in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report, and in Note 25 (“Business Segment Reporting”) of the Notes to Consolidated Financial Statements presented in Item 8. Financial Statements and Supplementary Data, which are incorporated herein by reference.

In addition to the customary banking services of accepting deposits and making loans, our bank and its trust company subsidiary offer personal and institutional trust custody services, securities lending, personal financial and planning services, access to mutual funds, treasury services, and international banking services. Through our bank, trust company, and registered investment adviser subsidiaries, we provide investment management services to clients that include large corporate and public retirement plans, foundations and endowments, high-net-worth individuals, and multi-employer trust funds established for providing pension or other benefits to employees.

We provide other financial services — both within and outside of our primary banking markets — through various nonbank subsidiaries. These services include community development financing, securities underwriting, investment banking and capital markets products, and brokerage. We also provide merchant services to businesses.

KeyCorp is a legal entity separate and distinct from its banks and other subsidiaries. Accordingly, the right of KeyCorp, its security holders, and its creditors to participate in any distribution of the assets or earnings of its banks and other subsidiaries is subject to the prior claims of the creditors of such banks and other subsidiaries, except to the extent that KeyCorp’s claims in its capacity as a creditor may be recognized.

We derive the majority of our revenues within the United States from customers domiciled in the United States. Revenue from foreign countries and external customers domiciled in foreign countries was immaterial to our consolidated financial statements.

Demographics

In the first quarter of 2019, we revised our management structure and changed our basis of presentation into two business segments, Consumer Bank and Commercial Bank. Note 25 (“Business Segment Reporting”) describes the products and services offered by each of these business segments and provides more detailed financial information pertaining to the segments, including changes in basis of presentation.

The Consumer Bank serves individuals and small businesses throughout our 15-state branch footprint and through our Laurel Road digital lending business by offering a variety of deposit and investment products, personal finance and financial wellness services, lending, student loan refinancing, mortgage and home equity, credit card, treasury services, and business advisory services. In addition, wealth management and investment services are offered to assist non-profit and high-net-worth clients with their banking, trust, portfolio management, charitable giving, and related needs.

The Commercial Bank is an aggregation of our Institutional and Commercial operating segments. The Commercial operating segment is a full-service corporate bank focused principally on serving the needs of middle market clients
6

in seven industry sectors: consumer, energy, healthcare, industrial, public sector, real estate, and technology. The Commercial operating segment is also a significant servicer of commercial mortgage loans and a significant special servicer of CMBS. The Institutional operating segment delivers a broad suite of banking and capital markets products to its clients, including syndicated finance, debt and equity capital markets, commercial payments, equipment finance, commercial mortgage banking, derivatives, foreign exchange, financial advisory, and public finance.

Additional Information

The following financial data is included in this report in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8. Financial Statements and Supplementary Data, and is incorporated herein by reference as indicated below:
Description of Financial Data Page Number
Selected Financial Data 41
Consolidated Average Balance Sheets, Net Interest Income and Yields/Rates from Continuing Operations 48
Components of Net Interest Income Changes from Continuing Operations 50
Composition of Loans 60
Remaining Maturities and Sensitivity of Certain Loans to Changes in Interest Rates 65
Securities Available for Sale 66
Held-to-Maturity Securities 67
Maturity Distribution of Time Deposits of $100,000 or More 68
Allocation of the Allowance for Loan and Lease Losses 83
Summary of Loan and Lease Loss Experience from Continuing Operations 84
Summary of Nonperforming Assets and Past Due Loans from Continuing Operations 85
Summary of Changes in Nonperforming Loans from Continuing Operations 85
Short-Term Borrowings 170

Our executive offices are located at 127 Public Square, Cleveland, Ohio 44114-1306, and our telephone number is (216) 689-3000. Our website is www.key.com, and the investor relations section of our website may be reached through www.key.com/ir. We make available free of charge, on or through the investor relations section of our website, annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Also posted on our website, and available in print upon request from any shareholder to our Investor Relations Department, are the charters for our Technology Committee, Audit Committee, Compensation and Organization Committee, Executive Committee, Nominating and Corporate Governance Committee, and Risk Committee; our Corporate Governance Guidelines; the Code of Business Conduct and Ethics for our directors, officers, and employees; our Standards for Determining Independence of Directors; our policy for Review of Transactions Between KeyCorp and Its Directors, Executive Officers and Other Related Persons; our Statement of Political Activity; and our Corporate Responsibility Report. Within the time period required by the SEC and the NYSE, we will post on our website any amendment to the Code of Ethics and any waiver applicable to any senior executive officer or director. We also make available a summary of filings made with the SEC of statements of beneficial ownership of our equity securities filed by our directors and officers under Section 16 of the Exchange Act. The “Regulatory Disclosures & Filings” section under the “Financials” tab of the investor relations section of our website includes public disclosures concerning our historic annual and mid-year stress-testing activities under the Dodd-Frank Act and our quarterly regulatory capital disclosures under the third pillar of Basel III.

Information contained on or accessible through our website or any other website referenced in this report is not part of this report. References to websites in this report are intended to be inactive textual references only.

Shareholders may obtain a copy of any of the above-referenced corporate governance documents by writing to our Investor Relations Department at Investor Relations, KeyCorp, 127 Public Square, Mailcode OH-01-27-0737, Cleveland, Ohio 44114-1306; by calling (216) 689-4221; or by sending an e-mail to investor_relations@keybank.com.
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Competition

The market for banking and related financial services is highly competitive. Key competes with other providers of financial services, such as BHCs, commercial banks, savings associations, credit unions, mortgage banking companies, finance companies, mutual funds, insurance companies, investment management firms, investment banking firms, broker-dealers, and other local, regional, national, and global institutions that offer financial services. Some of our competitors are larger and may have more financial resources, while some of our competitors enjoy fewer regulatory constraints and may have lower cost structures. The financial services industry has become more competitive as technology advances have lowered barriers to entry, enabling more companies, including nonbank companies, to provide financial services. Technological advances may diminish the importance of depository institutions and other financial institutions. Mergers and acquisitions have also led to increased concentration in the banking industry, placing added competitive pressure on Key’s core banking products and services as we see competitors enter some of our markets or offer similar products. We compete by offering quality products and innovative services at competitive prices, and by maintaining our product and service offerings to keep pace with customer preferences and industry standards.

Human Capital

Engaging a diverse and talented team is a top strategic priority for Key. Our human capital management strategy includes recruiting, developing, and retaining top talent, rewarding and recognizing our employees based on performance, discouraging imprudent risk-taking, cultivating a fair and inclusive culture, and delivering strong returns to our shareholders. As part of our focus on balancing risk and reward, we carefully design our compensation programs to align with the guidance of our regulators and regularly monitor the programs to remain within our risk tolerances. All incentives paid to our employees are subject to a robust risk adjustment process that begins before grant and extends beyond payment.

Key had an average of 16,826 full time equivalent employees in 2020. As of December 31, 2020, our employee count by region was approximately:

Region Employee Count
New England Region 417
East Region 2,479
Upstate New York Region 2,773
Northeast Ohio/Western Pennsylvania Region 6,128
Great Lakes Region 1,287
Rocky Mountain Region 1,182
Pacific Region 1,906
Corporate Offices (Out of Footprint) 1,613

Key’s purpose is to help our clients, colleagues, and communities thrive. We remain committed to attracting a talented and diverse workforce and supplier base that represents the clients and communities we serve. In 2020, we placed an emphasis on increasing minority representation in management and leadership roles, expanding our overall recruiting focus, developing diverse candidate slates and pipelines, increasing supplier diversity, and leveraging our existing employee resource groups to strengthen both engagement and inclusion.

As of December 31, 2020, our overall workforce was 59% female, 79% White, 8% Black/African American, 6% Hispanic/Latino, 5% Asian and 2% other. Our Board of Directors is 47% diverse (5 women and 2 minorities out of 15 total Directors) and our Executive Leadership Team is 23% diverse (3 women out of 13 total executives).

For more information about our diversity and inclusion efforts, a more detailed breakdown of employee diversity by EEO-1 categories, and information about how we work every day and in every way to help our clients, colleagues, and communities thrive, please see our website and our Corporate Responsibility Report at www.investor.key.com/esg-information/corporate-responsibility/.




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Information About Our Executive Officers

KeyCorp’s executive officers are principally responsible for making policy for KeyCorp, subject to the supervision and direction of the Board. All executive officers are subject to annual election at the annual organizational meeting of the Board held each May.

Set forth below are the names and ages of the executive officers of KeyCorp as of December 31, 2020, the positions held by each at KeyCorp during the past five years, and the year each first became an executive officer of KeyCorp. As previously disclosed on Form 8-K, Beth Mooney retired as Chairman and Chief Executive Officer on May 1, 2020. On December 28, 2020, Craig Beazer resigned as KeyCorp’s General Counsel and Secretary and that position remained vacant as of December 31, 2020. Because Mark Midkiff has been employed at KeyCorp for less than five years, information is being provided concerning his prior business experience. There are no family relationships among the directors or the executive officers, and there is no arrangement or understanding between any executive officer and any other person pursuant to which the executive officer was selected.

Victor B. Alexander (41) - Mr. Alexander has been KeyCorp’s Head of Consumer Bank and an executive officer of KeyCorp since January 2020. Prior to that time, he served as the Head of Home Lending from October 2018 to January 2020, Treasurer from July 2017 to October 2018, and Merger Integration Executive from December 2015 to June 2017.

Amy G. Brady (54) - Ms. Brady is KeyCorp’s Chief Information Officer, serving in that role since May 2012. Ms. Brady has been an executive officer of KeyCorp since she joined in 2012. She has been a director of DuPont de Nemours, Inc., a multi-industry specialty solutions company, since 2019.

Trina M. Evans (56) - Ms. Evans has been the Director of Corporate Center for KeyCorp since August 2012. Prior to this role, Ms. Evans was the Chief Administrative Officer for Key Community Bank and the Director of Client Experience for KeyBank. During her career with KeyCorp, she has served in a variety of senior management roles associated with the call center, internet banking, retail banking, distribution management and information technology. She became an executive officer of KeyCorp in March 2013.

Brian L. Fishel (55) - Mr. Fishel became the Chief Human Resources Officer and an executive officer of KeyCorp in May 2018. From 2013 to 2018, he served as the Director of Talent Management for KeyCorp.

Christopher M. Gorman (60) - Mr. Gorman has been Chairman, Chief Executive Officer, and President of KeyCorp since May 1, 2020. Mr. Gorman previously served as President and Chief Operating Officer from September 2019 to May 2020 and President of Banking and Vice Chairman from 2017 to September 2019. From 2016 to 2017, he served as Merger Integration Executive responsible for leading the integration efforts related to KeyCorp’s merger with First Niagara. Prior to that, Mr. Gorman was the President of Key Corporate Bank from 2010 to 2016. He became an executive officer of KeyCorp in 2010.

Clark H.I. Khayat (49) - Mr. Khayat rejoined KeyCorp as Chief Strategy Officer in January 2018. Mr. Khayat previously served as an Executive Vice President and Head of Key’s Enterprise Commercial Payments group from April 2014 to June 2016. He became an executive officer of KeyCorp in September 2018.

Donald R. Kimble (60) - Mr. Kimble has been the Chief Financial Officer of KeyCorp since June 2013. In 2017, Mr. Kimble was also named Vice Chairman. In January 2020, Mr. Kimble was also appointed Chief Administrative Officer. Mr. Kimble became an executive officer upon joining KeyCorp in June 2013.

Angela G. Mago (55) - Ms. Mago is the Head of Commercial Bank. She previously served as Co-Head of Key Corporate Bank from 2016 to May 2019. She also serves as Head of Real Estate Capital for Key, a role she has held since 2014. She became an executive officer of KeyCorp in 2016.

Mark W. Midkiff (58) - Mr. Midkiff became Chief Risk Officer and an executive officer of KeyCorp in January 2018. Prior to joining KeyCorp, Mr. Midkiff served as the Deputy Chief Credit Officer of BB&T from May 2017 to December 2017. He served as Chief Risk Officer of GE Capital from May 2015 to January 2017.

Andrew J. Paine III (51) - Mr. Paine is the Head of Institutional Bank. He previously served as Co-Head of Key Corporate Bank from 2016 to May 2019. He also serves as President of KeyBanc Capital Markets Inc., a role he has held since 2013. He became an executive officer of KeyCorp in 2016.
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Kevin T. Ryan (59) - Mr. Ryan has been the Chief Risk Review Officer and General Auditor of KeyCorp since 2007. He became an executive officer of KeyCorp in 2016.

Douglas M. Schosser (50) - Mr. Schosser has been the Chief Accounting Officer and an executive officer of KeyCorp since May 2015.

Supervision and Regulation
The regulatory framework applicable to BHCs and banks is intended primarily to protect consumers, the DIF, taxpayers and the banking system as a whole, rather than to protect the security holders and creditors of financial services companies. Comprehensive reform of the legislative and regulatory environment for financial services companies occurred in 2010 and remains ongoing. We cannot predict changes in applicable laws, regulations or regulatory agency policies, but any such changes may materially affect our business, financial condition, results of operations, or access to liquidity or credit.
Overview
Federal law establishes a system of regulation under which the Federal Reserve is the umbrella regulator for BHCs, while their subsidiaries are principally regulated by prudential or functional regulators: (i) the OCC for national banks and federal savings associations; (ii) the FDIC for state non-member banks and savings associations; (iii) the Federal Reserve for state member banks; (iv) the CFPB for consumer financial products or services; (v) the SEC and FINRA for securities broker/dealer activities; (vi) the SEC, CFTC, and NFA for swaps and other derivatives; and (vii) state insurance regulators for insurance activities. Certain specific activities, including traditional bank trust and fiduciary activities, may be conducted in a bank without the bank being deemed a “broker” or a “dealer” in securities for purposes of securities functional regulation.
Under the BHCA, BHCs generally may not directly or indirectly own or control more than 5% of the voting shares, or substantially all of the assets, of any bank, without prior approval from the Federal Reserve. In addition, BHCs are generally prohibited from engaging in commercial or industrial activities. However, a BHC that satisfies certain requirements regarding management, capital adequacy, and Community Reinvestment Act performance may elect to be treated as a Financial Holding Company (“FHC”) for purposes of federal law, and as a result may engage in a substantially broader scope of activities that are considered to be financial in nature or complementary to those activities. KeyCorp has elected to be treated as a FHC and, as such, is authorized to engage in securities underwriting and dealing, insurance agency and underwriting, and merchant banking activities. In addition, the Federal Reserve has permitted FHCs, like KeyCorp, to engage in the following activities, under the view that such activities are complementary to a financial activity: physical commodities trading activities, energy management services, and energy tolling, among others.
Under federal law, a BHC also must serve as a source of financial strength to its subsidiary depository institution(s) by providing financial assistance in the event of financial distress. This support may be required when the BHC does not have the resources to, or would prefer not to, provide it. Certain loans by a BHC to a subsidiary bank are subordinate in right of payment to deposits in, and certain other indebtedness of, the subsidiary bank. In addition, federal law provides that in the bankruptcy of a BHC, any commitment by the BHC to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
The Dodd-Frank Act created the FSOC to overlay the U.S. supervisory framework for BHCs, insured depository institutions, and other financial service providers, by serving as a systemic risk oversight body. Specifically, the FSOC is authorized to: (i) identify risks to U.S. financial stability that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected SIFIs, or that could arise outside the financial services marketplace; (ii) promote market discipline by eliminating expectations that the U.S. government will shield shareholders, creditors, and counterparties from losses in the event of failure; and (iii) respond to emerging threats to the stability of the U.S. financial system. The FSOC is responsible for facilitating regulatory coordination; information collection and sharing; designating nonbank financial companies for consolidated supervision by the Federal Reserve; designating systemic financial market utilities and systemic payment, clearing, and settlement activities requiring prescribed risk management standards and heightened federal regulatory oversight; recommending stricter standards for SIFIs; and, together with the Federal Reserve, determining whether action should be taken to break up firms that pose a grave threat to U.S. financial stability.
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As a FHC, KeyCorp is subject to regulation, supervision, and examination by the Federal Reserve under the BHCA. Our national bank subsidiaries and their subsidiaries are subject to regulation, supervision, and examination by the OCC. At December 31, 2020, we operated one full-service, FDIC-insured national bank subsidiary, KeyBank, and one national bank subsidiary that is limited to fiduciary activities. The FDIC also has certain, more limited regulatory, supervisory, and examination authority over KeyBank and KeyCorp under the FDIA and the Dodd-Frank Act.
We have other financial services subsidiaries that are subject to regulation, supervision, and examination by the Federal Reserve, as well as other state and federal regulatory agencies and self-regulatory organizations. Because KeyBank engages in derivative transactions, in 2013 it provisionally registered as a swap dealer with the CFTC and became a member of the NFA, the self-regulatory organization for participants in the U.S. derivatives industry. Our securities brokerage and asset management subsidiaries are subject to supervision and regulation by the SEC, FINRA, and state securities regulators, and our insurance subsidiaries are subject to regulation by the insurance regulatory authorities of the states in which they operate. Our other nonbank subsidiaries are subject to laws and regulations of both the federal government and the various states in which they are authorized to do business.

Regulatory capital requirements

Background

KeyCorp and KeyBank are subject to regulatory capital requirements that are based largely on the work of an international group of supervisors known as the Basel Committee on Banking Supervision (“Basel Committee”). The Basel Committee is responsible for establishing international bank supervisory standards for implementation in member jurisdictions, to enhance and align bank regulation on a global scale, and to promote financial stability.
The regulatory capital framework developed by the Basel Committee and implemented in the United States is a predominately risk-based capital framework that establishes minimum capital requirements based on the amount of regulatory capital a banking organization maintains relative to the amount of its total assets, adjusted to reflect credit risk (“risk-weighted assets”). Each banking organization subject to this regulatory capital framework is required to satisfy certain minimum risk-based capital measures (e.g., a tier 1 risk-based capital ratio requirement of tier 1 capital to total risk-weighted assets), and in the United States, a minimum leverage ratio requirement of tier 1 capital to average total on-balance sheet assets, which serves as a backstop to the risk-based measures.
A capital instrument is assigned to one of two tiers based on the relative strength and ability of that instrument to absorb credit losses on a going concern basis. Capital instruments with relatively robust loss-absorption capacity are assigned to tier 1, while other capital instruments with relatively less loss-absorption capacity are assigned to tier 2. A banking organization’s total capital equals the sum of its tier 1 and tier 2 capital.

The Basel Committee also developed a market risk capital framework (that also has been implemented in the United States) to address the substantial exposure to market risk faced by banking organizations with significant trading activity and augment the credit risk-based capital requirements described above. For example, the minimum total risk-based capital ratio requirement for a banking organization subject to the market risk capital rule equals the ratio of the banking organization’s total capital to the sum of its credit risk-weighted assets and market risk-weighted assets. Only KeyCorp is subject to the market risk capital rule, as KeyBank does not engage in substantial trading activity.

Basel III

To address deficiencies in the international regulatory capital standards identified during the 2007-2009 global financial crisis, in 2010 the Basel Committee released comprehensive revisions to the international regulatory capital framework, commonly referred to as “Basel III.” The Basel III revisions are designed to strengthen the quality and quantity of regulatory capital, in part through the introduction of a Common Equity Tier 1 capital requirement; provide more comprehensive and robust risk coverage, particularly for securitization exposures, equities, and off-balance sheet positions; and address pro-cyclicality concerns through the implementation of capital buffers. The Basel Committee also released a series of revisions to the market risk capital framework to address deficiencies identified during its initial implementation (e.g., arbitrage opportunities between the credit risk-based and market risk capital rules) and in connection with the global financial crisis.

In July 2013, the U.S. banking agencies adopted a final rule to implement Basel III with an effective date of January 1, 2015, and a multi-year transition period (“Regulatory Capital Rules”). As of April 1, 2020, the Regulatory Capital Rules are fully phased-in for Key. Consistent with the international framework, the Regulatory Capital Rules further restrict the type of instruments that may be recognized in tier 1 and tier 2 capital (including the phase out of trust
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preferred securities from tier 1 capital for BHCs above a certain asset threshold, like KeyCorp); establish a minimum Common Equity Tier 1 capital ratio requirement of 4.5% and capital buffers to absorb losses during periods of financial stress while allowing an institution to provide credit intermediation as it would during a normal economic environment; and refine several of the methodologies used for determining risk-weighted assets. The Regulatory Capital Rules provide additional requirements for large banking organizations with over $250 billion in total consolidated assets or $10 billion in foreign exposure, but those additional requirements do not apply to KeyCorp or KeyBank. Accordingly, for purposes of the Regulatory Capital Rules, KeyCorp and KeyBank are treated as “standardized approach” banking organizations.
Under the Regulatory Capital Rules, standardized approach banking organizations, such as KeyCorp and KeyBank, are required to meet the minimum capital and leverage ratios set forth in the following table. At December 31, 2020, KeyCorp’s ratios under the fully phased-in Regulatory Capital Rules are set forth in the following table.
Minimum Capital Ratios and KeyCorp Ratios Under
Regulatory Capital Rules
Ratios (including stress capital buffer) Regulatory Minimum Requirement
Stress Capital Buffer (b)
Regulatory Minimum With Stress Capital Buffer
KeyCorp December 31, 2020 (c)
Common Equity Tier 1 4.50 % 2.50 % 7.00 % 9.73 %
Tier 1 Capital 6.00 2.50 8.50 11.11
Total Capital 8.00 2.50 10.50 13.40
Leverage (a)
4.00 N/A 4.00 8.94
(a) As a standardized approach banking organization, KeyCorp is not subject to the 3% supplemental leverage ratio requirement, which became effective January 1, 2018.
(b) Stress Capital buffer must consist of Common Equity Tier 1 capital. As a standardized approach banking organization, KeyCorp is not subject to the countercyclical capital buffer of up to 2.5% imposed upon an advanced approaches banking organization under the Regulatory Capital Rules.
(c) Ratios reflect the five-year transition of CECL impacts on regulatory ratios.

Revised prompt corrective action framework

The federal prompt corrective action framework established under the FDIA groups FDIC-insured depository institutions into one of five prompt corrective action capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” In addition to implementing the Basel III capital framework in the U.S., the Regulatory Capital Rules also revised the prompt corrective action capital category threshold ratios applicable to FDIC-insured depository institutions such as KeyBank, with an effective date of January 1, 2015. The Revised Prompt Corrective Action Framework table below identifies the capital category threshold ratios for a “well capitalized” and an “adequately capitalized” institution under the Prompt Corrective Action Framework.
“Well Capitalized” and “Adequately Capitalized” Capital Category Ratios under
Revised Prompt Corrective Action Framework
Prompt Corrective Action Capital Category
Ratio
Well Capitalized (a)
Adequately Capitalized
Common Equity Tier 1 Risk-Based 6.5 % 4.5 %
Tier 1 Risk-Based 8.0 6.0
Total Risk-Based 10.0 8.0
Tier 1 Leverage (b)
5.0 4.0
(a) A “well capitalized” institution also must not be subject to any written agreement, order or directive to meet and maintain a specific capital level for any capital measure.
(b) As a standardized approach banking organization, KeyBank is not subject to the 3% supplemental leverage ratio requirement, which became effective January 1, 2018.
We believe that, as of December 31, 2020, KeyBank (consolidated) satisfied the risk-based and leverage capital requirements necessary to be considered “well capitalized” for purposes of the revised prompt corrective action framework. However, investors should not regard this determination as a representation of the overall financial condition or prospects of KeyBank because the prompt corrective action framework is intended to serve a limited supervisory function. Moreover, it is important to note that the prompt corrective action framework does not apply to BHCs, like KeyCorp.

Recent regulatory capital-related developments

In December 2017, the Basel Committee released its final revisions to Basel III. The revisions seek to restore credibility in the calculation of risk-weighted assets (“RWAs”) and improve the comparability of regulatory capital ratios across banking organizations by: (1) enhancing the robustness and risk-sensitivity of the standardized approach for credit risk, credit valuation adjustment, and operational risk; (2) constraining the use of internal models
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by placing limits on certain inputs used to calculate capital requirements under the internal ratings-based approach for credit risk (used by advanced approaches banking organizations) and removing the ability to use an internal model for purposes of determining the capital charge for credit valuation adjustment (“CVA”) risk and operational risk; (3) introducing a leverage ratio buffer to further limit the leverage of global systemically-important banks; and (4) replacing the existing Basel II output floor with a more robust, risk-sensitive floor based on the Basel III standardized approach.

The U.S. federal banking agencies released a statement announcing their support for the Basel Committee’s efforts, but cautioned that they will consider how to appropriately incorporate these revisions into the Regulatory Capital Rules, and that any proposed changes based on the Basel Committee revisions would be subject to notice-and-comment rulemaking. In view of the prohibition under the Dodd-Frank Act on the use of credit ratings in federal regulation, there is some uncertainty as to whether or how the agencies would implement the ratings-based aspects of the Basel Committee revisions to Basel III, as well as any other aspect of the Basel Committee revisions that permit the U.S. agencies to exercise home-country discretion, for example, due to differences in accounting or market practices, and legal requirements.

Subsequently, in December 2018, the Basel Committee released an update to its Pillar 3 disclosure framework, to more appropriately align it to the changes adopted under the Basel Committee’s final revisions to Basel III. Before any action is taken by the federal banking agencies with respect to the revised Pillar 3 disclosure framework, the federal agencies must determine whether and to what extent they will implement the final revisions to Basel III released by the Basel Committee in December 2017.

On July 9, 2019, the federal banking agencies issued a final rule to simplify certain aspects of the Regulatory Capital Rules for standardized approach banking organizations, including Key. The final rule simplifies, for these banking organizations, the regulatory capital requirements for mortgage servicing assets, certain deferred tax assets arising from temporary differences, and investments in the capital of unconsolidated financial institutions. The final rule replaces multiple deduction thresholds with a single 25% deduction threshold for each of these categories and requires that a 250% risk weight be applied to mortgage servicing assets and deferred tax assets that are not deducted from capital. The final rule also simplifies the calculation of the amount of capital issued by a consolidated subsidiary of a banking organization and held by third parties that is includable in regulatory capital. In addition, the final rule makes certain technical amendments to the Regulatory Capital Rules that are applicable to standardized approach banking organizations as well as advanced approaches banking organizations. The final rule provided an effective date of October 1, 2019, for the technical amendments and an effective date of April 1, 2020, for the simplification changes. On November 13, 2019, the federal banking agencies published an amendment to the final rule to provide standardized approach banking organizations with the option to implement the simplification changes on either January 1, 2020, or April 1, 2020. We chose to implement the simplification changes on April 1, 2020.

In November 2019, the federal banking agencies adopted a final rule to amend the Regulatory Capital Rules by revising the definition of a high volatility commercial real estate (“HVCRE”) exposure. HVCRE exposures are subject to a heightened risk weight under the Regulatory Capital Rules. The final rule, which became effective on April 1, 2020, conforms the HVCRE definition to statutory changes enacted in May 2018. The final rule also clarifies the treatment under the revised HVCRE definition of credit facilities that finance one-to-four family residential properties as well as credit facilities that finance the development of land.

A final rule adopted by the federal banking agencies in February 2019 provides banking organizations with the option to phase in, over a three-year period, the adverse day-one regulatory capital effects of the adoption of the CECL accounting standard. On March 27, 2020, the federal banking agencies issued an interim final rule that gives banking organizations that are required under U.S. accounting standards to adopt CECL before the end of 2020 the option to delay for two years CECL’s adverse effects on regulatory capital (“CECL Interim Final Rule”). This is in addition to the three-year transition period already in place, resulting in an optional five-year transition. The agencies noted that this relief is being provided in order to allow banking organizations to better focus on lending to creditworthy households and businesses affected by recent strains on the U.S. economy caused by COVID-19.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), enacted on March 27, 2020, provides banking organizations with the option to not comply with CECL until the earlier of (i) the termination date of the national emergency concerning COVID-19 declared by the President under the National Emergencies Act; or (ii) December 31, 2020. The federal banking agencies issued a statement on March 31, 2020, indicating that banking organizations that elect to use the optional, temporary statutory relief will be able to elect the remaining period of
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regulatory capital relief provided under the CECL Interim Final Rule after the end of the statutory relief period. Alternatively, banking organizations may adopt CECL as planned in 2020 and use the regulatory capital relief provided under the CECL Interim Final Rule starting at the time of their adoption of CECL.

On August 26, 2020, the federal banking agencies issued a final rule that is substantially similar to the CECL Interim Final Rule. Like the CECL Interim Final Rule, the final rule gives eligible banking organizations the option to mitigate the estimated adverse effects on regulatory capital of CECL for two years, followed by a three-year transition period, which results in an optional five-year transition. The final rule expands the group of institutions eligible for this optional five-year transition to include any institution adopting CECL in 2020. The final rule also includes certain minor adjustments to clarify the calculation of the transitional amount. Key elected to adopt CECL as planned in the first quarter of 2020 and exercise the option to use a five-year transition to measure CECL’s effects on regulatory capital.

Liquidity requirements

U.S. banking organizations are subject to regulatory liquidity requirements based on international liquidity standards established by the Basel Committee in 2010, and subsequently revised between 2013 and 2014 (as revised, the “Basel III liquidity framework”). The Basel III liquidity framework establishes quantitative standards designed to ensure that a banking organization is appropriately positioned, from a balance sheet perspective, to satisfy its short- and long-term funding needs.

To address short-term liquidity risk, the Basel III liquidity framework established a liquidity coverage ratio (“Basel III LCR”), calculated as the ratio of a banking organization’s high-quality liquid assets to its total net cash outflows over 30 consecutive calendar days. In addition, to address long-term liquidity risk, the Basel III liquidity framework established a net stable funding ratio (“Basel III NSFR”), calculated as the ratio of the amount of stable funding available to a banking organization to its required amount of stable funding.

In October 2014, the federal banking agencies published a final rule to implement the Basel III LCR for U.S. banking organizations (the “Liquidity Coverage Rules”). Consistent with the Basel III LCR, the U.S. Liquidity Coverage Rules established a minimum LCR for certain internationally active bank and nonbank financial companies (excluding KeyCorp), and a modified version of the LCR (“Modified LCR”) for BHCs and other depository institution holding companies with over $50 billion in consolidated assets that are not internationally active (including KeyCorp). Under the Liquidity Coverage Rules, KeyCorp was required to calculate a Modified LCR on a monthly basis and was required to satisfy a minimum Modified LCR requirement of 100%. KeyBank was not subject to the LCR or the Modified LCR under the Liquidity Coverage Rules.

In December 2016, the Federal Reserve adopted a final rule to implement public disclosure requirements for the LCR and Modified LCR. Under the final rule, each calendar quarter KeyCorp was required to publicly disclose certain quantitative information regarding its Modified LCR calculation, together with a discussion of the factors that have a significant effect on its Modified LCR. KeyCorp began complying with these disclosure requirements for the calendar quarter beginning October 1, 2018.

Large BHCs, like KeyCorp, are also subject to liquidity requirements contained in regulations adopted pursuant to the Dodd-Frank Act and the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”). As enacted in 2010, the Dodd-Frank Act required the Federal Reserve to impose enhanced prudential standards and early remediation requirements (collectively, “EPSs”), including enhanced liquidity standards, upon BHCs (like KeyCorp) with at least $50 billion in total consolidated assets.

In March 2014, the Federal Reserve published a final rule to implement certain of the EPSs required under the Dodd-Frank Act, including liquidity requirements relating to cash flow projections, a contingency funding plan, liquidity risk limits, the monitoring of liquidity risks (with respect to collateral, legal entities, currencies, business lines, and intraday exposures), liquidity stress testing, a liquidity buffer, and liquidity risk management requirements, including requirements that apply to the board of directors, the risk committee, senior management, and the independent review function. KeyCorp was required to comply with the final rule starting on January 1, 2015.

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EGRRCPA, enacted on May 24, 2018, raised the asset threshold above which the Federal Reserve is required to apply EPSs to BHCs from $50 billion to $250 billion. EGRRCPA gave the Federal Reserve the authority, following notice and comment procedures, to continue to apply EPSs to any BHCs having at least $100 billion but less than $250 billion in total consolidated assets (like KeyCorp) if it determines that the application of the EPS is appropriate to prevent or mitigate risks to financial stability or to promote the safety and soundness of the BHC or BHCs, taking into consideration the BHC’s or BHCs’ capital structure, riskiness, complexity, financial activities, size, and other relevant factors.

In October 2019, the federal banking agencies issued two final rules related to the implementation of EGRRCPA (“Tailoring Rules”). The final rules established four risk-based categories of banking organizations with $100 billion or more in total consolidated assets and applied tailored regulatory requirements to each respective category. Based on Key’s analysis of the Tailoring Rules, KeyCorp falls within the least restrictive of those categories (“Category IV Firms”). The Tailoring Rules became effective on December 31, 2019.

In one of the Tailoring Rules, the federal banking agencies amended various rules, including the rules governing standardized liquidity requirements, thereby applying tailored liquidity requirements to large banking organizations in each of the four risk-based categories of institutions described in the Tailoring Rules. Under this final rule, Category IV Firms with weighted short-term wholesale funding of less than $50 billion will not be subject to a reduced LCR. KeyCorp believes that it does not meet the $50 billion threshold and that it will not be subject to the reduced LCR. Thus, as of December 31, 2019, KeyCorp is no longer subject to an LCR requirement or an LCR public disclosure requirement.

In the other Tailoring Rule, the Federal Reserve amended certain of its rules governing EPSs to apply tailored regulatory standards (including liquidity standards) to large BHCs in each of the four risk-based categories of institutions described in the Tailoring Rules. Under this rule, Category IV Firms (like KeyCorp) are required to conduct internal liquidity stress tests quarterly rather than monthly as was previously the case and are subject to simplified liquidity risk management requirements, including requirements to adopt a set of liquidity risk limits that is more limited than previously required, calculate collateral positions monthly rather than weekly, and monitor fewer elements of intraday liquidity risk exposures. Category IV Firms are still required to maintain a liquidity buffer that is sufficient to meet the projected net stressed cash-flow need over a 30-day planning horizon under the firm’s internal liquidity stress test and remain subject to monthly tailored FR 2052a liquidity reporting requirements.

On October 20, 2020, the federal banking agencies adopted a final rule to implement the Basel III NSFR for U.S. banking organizations. The NSFR final rule, which is effective on July 1, 2021, requires certain banking organizations with more than $100 billion in total assets to maintain minimum amounts of stable funding to support their assets, commitments, and derivatives exposures over a one-year time horizon. The final NSFR rule tailors the application of the NSFR requirement to large banking organizations in each of the four risk-based categories of institutions established by the Tailoring Rules. Key is a Category IV firm. Category IV firms with average weighted short-term wholesale funding of less than $50 billion will not be subject to an NSFR requirement. Key believes that it does not meet the $50 billion threshold and that it will not be subject to an NSFR requirement.

Capital planning and stress testing

The Federal Reserve’s capital plan rule requires each U.S.-domiciled, top-tier BHC with total consolidated assets of at least $100 billion (like KeyCorp) to develop and maintain a written capital plan supported by a robust internal capital adequacy process. The capital plan must be submitted to the Federal Reserve for supervisory review in connection with the BHC’s CCAR (described below). The supervisory review includes an assessment of many factors, including KeyCorp’s ability to maintain capital above each minimum regulatory capital ratio on a pro forma basis under expected and stressful conditions throughout the planning horizon.

The Federal Reserve’s CCAR is an intensive assessment of the capital adequacy of large U.S. BHCs and of the practices these BHCs use to assess their capital needs. The Federal Reserve expects BHCs subject to CCAR to have and maintain regulatory capital in an amount that is sufficient to withstand a severely adverse operating environment and, at the same time, be able to continue operations, maintain ready access to funding, meet obligations to creditors and counterparties, and provide credit intermediation.

The Federal Reserve conducted a supervisory stress test on KeyCorp, pursuant to which the Federal Reserve projects revenue, expenses, losses, and resulting post-stress capital levels and regulatory capital ratios under conditions that affect the U.S. economy or the financial condition of KeyCorp, including supervisory baseline and
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severely adverse scenarios (and through 2018, an adverse scenario), that are determined by the Federal Reserve. KeyCorp and KeyBank have also been required to conduct their own company-run stress tests to assess the impact of stress scenarios (including supervisor-provided baseline, adverse, and severely adverse scenarios and, for KeyCorp, one KeyCorp-defined baseline scenario and at least one KeyCorp-defined stress scenario) on their consolidated earnings, losses, and capital over a nine-quarter planning horizon, taking into account their current condition, risks, exposures, strategies, and activities. While KeyBank has only had to conduct an annual stress test, KeyCorp has had to conduct both an annual and a mid-cycle stress test. KeyCorp and KeyBank have been required to report the results of their annual stress tests to the Federal Reserve and the OCC. KeyCorp has been required to report the results of its mid-cycle stress test to the Federal Reserve. Summaries of the results of these company-run stress tests have been disclosed under the “Regulatory Disclosures & Filings” section of the “Financials” tab of Key’s Investor Relations website: http://www.key.com/ir.

One of the Tailoring Rules issued by the Federal Reserve in October 2019 to implement EGRRCPA changes the stress testing requirements applicable to BHCs that are Category IV Firms (like KeyCorp). Under this rule, Category IV Firms will no longer be required to conduct and publicly disclose the results of company-run stress tests and will be subject to a supervisory stress test conducted by the Federal Reserve every other year rather than every year as has been the case. In 2020, KeyCorp was required to participate in the Federal Reserve’s CCAR process and was subject to a supervisory stress test conducted by the Federal Reserve.

A separate rule was issued by the federal banking agencies in October 2019 to implement a provision in EGRRCPA that raised the asset threshold that triggers the requirement for federally-regulated banks to conduct company-run stress tests on an annual basis from $10 billion to $250 billion in total consolidated assets. Under this final rule, federally-regulated banks with total assets of less than $250 billion (like KeyBank) will no longer be required to conduct annual company-run stress tests. Also, this final rule removes the “adverse” scenario as a required scenario for all stress testing requirements applicable to BHCs and federally-regulated banks so that such stress tests will be required to include only “baseline” and “severely adverse” scenarios.

On March 4, 2020, the Federal Reserve adopted a final rule integrating certain aspects of the Federal Reserve’s Regulatory Capital Rules with CCAR and the stress test rules in order to simplify the overall capital framework that is currently applicable to BHCs that have $100 billion or more in total consolidated assets (including KeyCorp). Under the final rule, the Federal Reserve amended the capital conservation buffer requirement under the Regulatory Capital Rules by replacing the static risk-weighted assets component of the buffer with a new measure, the stress capital buffer, which will be based on the results of an individual BHC’s supervisory stress test and cannot be less than 2.5 percent of risk-weighted assets. A firm will be subject to limitations on capital distributions and discretionary bonus payments if it does not satisfy all minimum capital requirements and its stress capital buffer requirement. A firm’s stress capital buffer requirement will become effective on October 1 of each year and will remain in effect until September 30 of the following year unless the firm receives an updated stress capital buffer requirement from the Federal Reserve.

On March 20, 2020, the federal banking agencies published an interim final rule that revises the definition of eligible retained income as that term is used in the agencies’ Regulatory Capital Rules. The revised definition applies to all buffer requirements applicable to a banking organization, including the stress capital buffer requirement adopted by the Federal Reserve on March 4, 2020. The revised definition of eligible retained income will make any automatic limitations on capital distributions that could apply under the agencies’ capital rules more gradual with the objective of promoting continued lending during a period of stress, including the period of stress resulting from the COVID-19 pandemic. On August 26, 2020, the federal banking agencies issued a final rule that adopts, without change, the interim final rule issued in March 2020 that revises the definition of eligible retained income as that term is used in the agencies’ Regulatory Capital Rules.

In April 2020, we submitted our 2020 capital plan to the Federal Reserve under the Federal Reserve’s CCAR process. On June 25, 2020, the Federal Reserve publicly announced the results of its CCAR process and the supervisory stress test that it conducted of 33 BHCs having more than $100 billion in total consolidated assets (including KeyCorp). The Federal Reserve indicated that it planned to use the results of this stress test to set the new stress capital buffer requirement for these firms, which would take effect in the fourth quarter of 2020. The Federal Reserve also announced the results of a sensitivity analysis it conducted to assess the resiliency of these firms under three hypothetical downside scenarios which could result from the COVID-19 disruptions.

Because of the results of its sensitivity analysis, the Federal Reserve decided to take certain actions to require large banking organizations to preserve capital and re-evaluate their capital plans. Specifically, the Federal Reserve stated that it was requiring each firm subject to its capital plan rule to update and resubmit its capital plan to the
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appropriate Reserve Bank within 45 days after the Federal Reserve provides updated scenarios. The Federal Reserve further indicated that for the third quarter of 2020, these firms were prohibited from (i) making share repurchases (other than share repurchases relating to issuances of common stock for employee stock ownership plans); and (ii) paying common stock dividends that exceed the amount paid in the second quarter of 2020 or exceed an amount equal to the average of the firm’s net income for the four preceding calendar quarters unless otherwise specified by the Federal Reserve. The Federal Reserve said that it may extend these restrictions quarter-by-quarter depending upon the economic circumstances.

On June 30, 2020, KeyCorp announced that its preliminary stress capital requirement, provided by the Federal Reserve as part of the 2020 Federal Reserve capital stress testing exercise, is 2.5%, which represents the minimum buffer required for banking organizations the size of Key. KeyCorp also announced that its capital plans included maintaining its common stock dividend for the third quarter of 2020 at the same level as the second quarter of 2020, subject to approval by KeyCorp’s Board of Directors, which the Board subsequently approved on July 8, 2020. On August 10, 2020, the Federal Reserve confirmed KeyCorp’s stress capital requirement of 2.5%.

On September 17, 2020, the Federal Reserve announced three supervisory scenarios (baseline, severely adverse, and alternative severe) that firms subject to the Federal Reserve’s capital plan rule must use in preparing their updated 2020 capital plan resubmissions and that the Federal Reserve would use in conducting its updated stress analyses of these firms. The Federal Reserve stated that it planned to release firm-specific results from the firms’ performance under these scenarios by the end of 2020.

Due to the continued economic uncertainty caused by the pandemic, the Federal Reserve announced on September 30, 2020, that it was extending for an additional quarter certain measures to ensure that large banking organizations maintain a high level of capital resilience. Specifically, the Federal Reserve stated that banking organizations with more than $100 billion in total assets would be subject to the same prohibition on share repurchases and limitation on dividend payments for the fourth quarter of 2020 that they were subject to for the third quarter of 2020.

On December 18, 2020, the Federal Reserve announced the results of the second round of stress tests for 2020 that it conducted on large banking organizations (including KeyCorp). The Federal Reserve indicated that, in the aggregate, capital ratios for the 33 firms subject to the stress tests remained well above their required minimum levels throughout the projection horizon under both the severely adverse and alternative severe scenarios. However, the Federal Reserve stated that because of the ongoing economic uncertainty, it was extending its limits on capital distributions by these banking organizations into the first quarter of 2021, with certain modifications. The Federal Reserve said that these firms (including KeyCorp) (1) are prohibited from increasing their common stock dividends to an amount greater than the amount paid in the second quarter of 2020 and (2) are prohibited from paying common stock dividends and making share repurchases that, in the aggregate, exceed an amount equal to the average of the firm’s net income for the four preceding calendar quarters. The Federal Reserve further indicated that it may extend these restrictions beyond the first quarter of 2021 and that it was extending the time period to notify firms whether their stress capital buffer requirements will be recalculated until March 31, 2021.

On January 19, 2021, the Federal Reserve issued a final rule to make conforming changes to the capital planning, regulatory reporting, and stress capital buffer requirements for firms subject to Category IV standards (including KeyCorp) to make these requirements consistent with the tailored regulatory framework for large banking organizations that the Federal Reserve adopted in an October 2019 rulemaking. The final rule revises the elements of the capital plan that Category IV firms are required to submit to the Federal Reserve and makes related changes to regulatory reporting requirements. Also, the final rule updates the frequency for calculating the stress capital buffer for these firms. In addition, the final rule makes certain clarifying changes to the stress testing rules applicable to all large banking organizations.

Dividend restrictions

Federal law and regulation impose limitations on the payment of dividends by our national bank subsidiaries, like KeyBank. Historically, dividends paid by KeyBank have been an important source of cash flow for KeyCorp to pay dividends on its equity securities and interest on its debt. Dividends by our national bank subsidiaries are limited to the lesser of the amounts calculated under an earnings retention test and an undivided profits test. Under the earnings retention test, without the prior approval of the OCC, a dividend may not be paid if the total of all dividends declared by a bank in any calendar year is in excess of the current year’s net income combined with the retained net income of the two preceding years. Under the undivided profits test, a dividend may not be paid in excess of a bank’s undivided profits. Moreover, under the FDIA, an insured depository institution may not pay a dividend if the
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payment would cause it to be less than “adequately capitalized” under the prompt corrective action framework or if the institution is in default in the payment of an assessment due to the FDIC. Similarly, under the Regulatory Capital Rules, a banking organization that fails to satisfy the minimum capital conservation buffer requirement will be subject to certain limitations, which include restrictions on capital distributions. Large banking organizations are subject to additional restrictions on capital distributions imposed by the Federal Reserve because of economic uncertainty caused by the COVID-19 pandemic. For more information on these restrictions, please see the section above entitled “Regulatory capital requirements - Capital planning and stress testing” and for more information about the payment of dividends by KeyBank to KeyCorp, please see Note 3 (“Restrictions on Cash, Dividends, and Lending Activities”) in this report.

FDIA, Resolution Authority and Financial Stability

Deposit insurance and assessments

The DIF provides insurance coverage for domestic deposits funded through assessments on insured depository institutions like KeyBank. The amount of deposit insurance coverage for each depositor’s deposits is $250,000 per depository.

The FDIC must assess the premium based on an insured depository institution’s assessment base, calculated as its average consolidated total assets minus its average tangible equity. KeyBank’s current annualized premium assessments can range from $.025 to $.45 for each $100 of its assessment base. The rate charged depends on KeyBank’s performance on the FDIC’s “large and highly complex institution” risk-assessment scorecard, which includes factors such as KeyBank’s regulatory rating, its ability to withstand asset and funding-related stress, and the relative magnitude of potential losses to the FDIC in the event of KeyBank’s failure.

In December 2016, the FDIC issued a final rule that imposes recordkeeping requirements on insured depository institutions with two million or more deposit accounts (including KeyBank), to facilitate rapid payment of insured deposits to customers if such an institution were to fail. The rule requires those insured depository institutions to: (i) maintain complete and accurate data on each depositor’s ownership interest by right and capacity for all of the institution’s deposit accounts; and (ii) develop the capability to calculate the insured and uninsured amounts for each deposit owner within 24 hours of failure. The FDIC will conduct periodic testing of compliance with these requirements, and institutions subject to the rule must submit to the FDIC a certification of compliance, signed by the bank’s CEO, and deposit insurance coverage summary report on or before the mandatory compliance date and annually thereafter. The final rule became effective on April 1, 2017, with a mandatory compliance date of April 1, 2020. On July 16, 2019, the FDIC approved amendments that revise certain aspects of this rule. Among other things, the amendments to this rule (i) provide covered institutions with the option to extend the compliance date to no later than April 1, 2021, upon notification to the FDIC; (ii) clarify the certification requirement; (iii) revise the actions that must be taken for deposit accounts insured on a pass-through basis (where the bank’s account holder is holding funds on behalf of the beneficial owners of the funds); and (iv) streamline the process for submitting exception requests to the FDIC.

Conservatorship and receivership of insured depository institutions

Upon the insolvency of an insured depository institution, the FDIC will be appointed as receiver or, in rare circumstances, conservator for the insolvent institution under the FDIA. In an insolvency, the FDIC may repudiate or disaffirm any contract to which the institution is a party if the FDIC determines that performance of the contract would be burdensome and that disaffirming or repudiating the contract would promote orderly administration of the institution’s affairs. If the contractual counterparty made a claim against the receivership (or conservatorship) for breach of contract, the amount paid to the counterparty would depend upon, among other factors, the receivership (or conservatorship) assets available to pay the claim and the priority of the claim relative to others. In addition, the FDIC may enforce most contracts entered into by the insolvent institution, notwithstanding any provision that would terminate, cause a default, accelerate or give other rights under the contract solely because of the insolvency, the appointment of the receiver (or conservator), or the exercise of rights or powers by the receiver (or conservator). The FDIC may also transfer any asset or liability of the insolvent institution without obtaining approval or consent from the institution’s shareholders or creditors. These provisions would apply to obligations and liabilities of KeyCorp’s insured depository institution subsidiaries, such as KeyBank, including obligations under senior or subordinated debt issued to public investors.

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Receivership of certain SIFIs

The Dodd-Frank Act created a new resolution regime, as an alternative to bankruptcy, known as the “orderly liquidation authority” (“OLA”) for certain SIFIs, including BHCs and their affiliates. Under the OLA, the FDIC would generally be appointed as receiver to liquidate and wind down a failing SIFI. The determination that a SIFI should be placed into OLA receivership is made by the U.S. Treasury Secretary, who must conclude that the SIFI is in default or in danger of default and that the SIFI’s failure poses a risk to the stability of the U.S. financial system. This determination must come after supermajority recommendations by the Federal Reserve and the FDIC, and consultation between the U.S. Treasury Secretary and the President.

If the FDIC is appointed as receiver under the OLA, its powers and the rights and obligations of creditors and other relevant parties would be determined exclusively under the OLA. The powers of a receiver under the OLA are generally based on the FDIC’s powers as receiver for insured depository institutions under the FDIA. Certain provisions of the OLA were modified to reduce disparate treatment of creditors’ claims between the U.S. Bankruptcy Code and the OLA. However, substantial differences between the two regimes remain, including the FDIC’s right to disregard claim priority in some circumstances, the use of an administrative claims procedure under OLA to determine creditors’ claims (rather than a judicial procedure in bankruptcy), the FDIC’s right to transfer claims to a bridge entity, and limitations on the ability of creditors to enforce contractual cross-defaults against potentially viable affiliates of the entity in receivership. OLA liquidity would be provided through credit support from the U.S. Treasury and assessments made, first, on claimants against the receivership that received more in the OLA resolution than they would have received in ordinary liquidation (to the full extent of the excess), and second, if necessary, on SIFIs like KeyCorp utilizing a risk-based methodology.

In December 2013, the FDIC published a notice for comment regarding its “single point of entry” resolution strategy under the OLA. This strategy involves the appointment of the FDIC as receiver for the SIFI’s top-level U.S. holding company only, while permitting the operating subsidiaries of the failed holding company to continue operations uninterrupted. As receiver, the FDIC would establish a bridge financial company for the failed holding company and would transfer the assets and a very limited set of liabilities of the receivership estate. The claims of unsecured creditors and other claimants in the receivership would be satisfied by the exchange of their claims for the securities of one or more new holding companies emerging from the bridge company. The FDIC has not taken any subsequent regulatory action relating to this resolution strategy under OLA since the comment period ended in March 2014.

Depositor preference

The FDIA provides that, in the event of the liquidation or other resolution of an insured depository institution, the claims of its depositors (including claims of its depositors that have subrogated to the FDIC) and certain claims for administrative expenses of the FDIC as receiver have priority over other general unsecured claims. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will be placed ahead of unsecured, nondeposit creditors, including the institution’s parent BHC and subordinated creditors, in order of priority of payment.

Resolution plans

BHCs with at least $50 billion in total consolidated assets, like KeyCorp, have been required to periodically submit to the Federal Reserve and FDIC a plan discussing how the company could be rapidly and orderly resolved if the company failed or experienced material financial distress. Insured depository institutions with at least $50 billion in total consolidated assets, like KeyBank, have also been required to submit a resolution plan to the FDIC. These plans have been due annually unless the requirement to submit the plans was deferred by the regulators. The Federal Reserve and FDIC make available on their websites the public sections of resolution plans for the companies, including KeyCorp and KeyBank, that submitted plans. The public sections of the resolution plans of KeyCorp and KeyBank are available at http://www.federalreserve.gov/supervisionreg/resolution-plans.htm and https://www.fdic.gov/regulations/reform/resplans/.

In October 2019, the Federal Reserve and FDIC adopted a final rule to modify the resolution planning requirements applicable to large BHCs. Under this final rule, BHCs with less than $250 billion in total consolidated assets will no longer be required to submit a resolution plan unless they have $75 billion or more in certain risk-based indicators. Under this final rule, KeyCorp is no longer subject to resolution planning requirements.

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On April 16, 2019, the FDIC issued an advance notice of proposed rulemaking (“ANPR”) requesting public comment on potential changes to its rule imposing resolution planning requirements on large insured depository institutions, including potential modifications to the rule in the following areas: (i) creation of tiered resolution planning requirements based on institution size, complexity, and other factors; (ii) revisions to the frequency and required content of plan submissions, including elimination of plan submissions for a category of smaller and less complex institutions; (iii) improvements to the process for periodic engagements between the FDIC and institutions on resolution-related matters; and (iv) revision of the $50 billion asset threshold in the current rule. The FDIC indicated that it is considering two alternate approaches with respect to the tiering of resolution plan requirements. Under each of these approaches, institutions would be placed into three groups with the first two groups required to submit resolution plans with streamlined content requirements and the third group not required to submit a resolution plan. The FDIC would engage with institutions in all three groups on a periodic basis on a limited number of items related to resolution planning and would conduct periodic testing of the resolution planning capabilities of these institutions. Comments on this ANPR were due by June 21, 2019. Any changes to this rule will impact KeyBank. The FDIC extended the due date for the next resolution plan submission for all institutions until after the rulemaking is completed.

On January 19, 2021, the FDIC issued a statement announcing that it will resume requiring insured depository institutions with $100 billion or more in assets to submit resolution plans. The FDIC said that it intends to streamline resolution plan content requirements and emphasize periodic engagement with firms regarding resolution planning issues. The FDIC further indicated that no firm will be required to submit a plan without at least twelve months advance notice being provided to the firm.

Other Regulatory Developments

The Bank Secrecy Act

The BSA requires all financial institutions (including banks and securities broker-dealers) to, among other things, maintain a risk-based system of internal controls reasonably designed to prevent money laundering and the financing of terrorism. It includes a variety of recordkeeping and reporting requirements (such as cash and suspicious activity reporting) as well as due diligence and know-your-customer documentation requirements. Key has established and maintains an anti-money laundering program to comply with the BSA’s requirements.

Consumer Financial Protection Bureau

Title X of the Dodd-Frank Act created the CFPB, a consumer financial services regulator with supervisory authority over banks and their affiliates with assets of more than $10 billion, like Key, to carry out federal consumer protection laws. The CFPB also regulates financial products and services sold to consumers and has rulemaking authority with respect to federal consumer financial laws. Any new regulatory requirements promulgated by the CFPB or modifications in the interpretations of existing regulations could require changes to Key’s consumer-facing businesses. The Dodd-Frank Act also gives the CFPB broad data collecting powers for fair lending for both small business and mortgage loans, as well as extensive authority to prevent unfair, deceptive and abusive practices.

Volcker Rule

The Volcker Rule implements Section 619 of the Dodd-Frank Act, which prohibits “banking entities,” such as KeyCorp, KeyBank and their affiliates and subsidiaries, from owning, sponsoring, or having certain relationships with hedge funds and private equity funds (referred to as “covered funds”) and engaging in short-term proprietary trading of financial instruments, including securities, derivatives, commodity futures and options on these instruments.

The Volcker Rule excepts certain transactions from the general prohibition against proprietary trading, including transactions in government securities (e.g., U.S. Treasuries or any instruments issued by the GNMA, FNMA, FHLMC, a Federal Home Loan Bank, or any state or a political division of any state, among others); transactions in connection with underwriting or market-making activities; and transactions as a fiduciary on behalf of customers. A banking entity may also engage in risk-mitigating hedging activity if it can demonstrate that the hedge reduces or mitigates a specific, identifiable risk or aggregate risk position of the entity. The banking entity is required to conduct an analysis supporting its hedging strategy and the effectiveness of the hedges must be monitored and, if necessary, adjusted on an ongoing basis.

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Although the Volcker Rule became effective on April 1, 2014, the Federal Reserve exercised its unilateral authority to extend the compliance deadline until July 21, 2017, with respect to covered funds. In addition, on December 12, 2016, the Federal Reserve released additional guidelines regarding how banking entities may seek an extension of the conformance period for certain legacy covered fund investments. Under the Dodd-Frank Act, the Federal Reserve is authorized to provide a banking entity up to an additional five years to conform legacy investments (i.e., contractual commitments of a banking organization on or before May 1, 2010, to make an investment) in “illiquid” covered funds.

Key does not anticipate that the proprietary trading restrictions in the Volcker Rule will have a material impact on its business, but it may be required to divest certain fund investments as discussed in more detail in Note 6 (“Fair Value Measurements”) in Item 8 of this report. On January 13, 2017, Key filed for an additional extension for illiquid funds, to retain certain indirect investments until the earlier of the date on which the investments are conformed or are expected to mature or July 21, 2022. The application for an extension was approved on February 14, 2017. As of December 31, 2020, we have not committed to a plan to sell these investments. Therefore, these investments continue to be valued using the net asset value per share methodology.

On October 8, 2019, five federal agencies announced their adoption of a final rule to simplify and tailor requirements relating to the Volcker Rule. Among other things, the final rule (i) revises the definition of certain terms relevant in determining the scope of the Volcker Rule; (ii) modifies the eligibility criteria for a banking entity to be able to rely on certain exemptions and exclusions from the proprietary trading and covered fund prohibitions; (iii) adds additional proprietary trading exclusions; and (iv) tailors the rule’s compliance requirements based on the size of a firm’s trading assets and liabilities. Under the final rule, a banking entity is subject to the most stringent compliance requirements if it has “significant” trading assets and liabilities, that is, total consolidated trading assets and liabilities of at least $20 billion. A banking entity with total consolidated trading assets and liabilities between $1 billion and $20 billion is regarded as having “moderate” trading assets and liabilities and is subject to a requirement to have a simplified compliance program that must be appropriate given that banking entity’s activities, size, scope, and complexity. A presumption of compliance applies to a banking entity with “limited” trading assets and liabilities, that is, total consolidated trading assets and liabilities of less than $1 billion. The final rule rule became effective on January 1, 2020, and the compliance date was January 1, 2021. Key believes that it will be regarded as having “moderate” trading assets and liabilities as calculated under the final rule. We do not expect the final rule to have a material impact on Key.

On June 25, 2020, five federal agencies announced their adoption of a final rule to clarify and streamline the covered fund-related provisions of the Volcker Rule. Among other things, the final rule (i) permits certain low-risk transactions (including intraday credit, riskless principal, and payment, clearing, and settlement transactions) between a banking entity and covered funds for which the banking entity serves as the investment adviser, investment manager, or sponsor; (ii) clarifies exclusions from the covered fund definition for foreign public funds, loan securitizations, small business investment companies, and public welfare investment funds; and (iii) permits banking entities to invest in or sponsor certain types of funds that do not raise the concerns that the Volcker Rule was intended to address, such as credit funds, venture capital funds, customer facilitation funds, and family wealth management vehicles. The final rule became effective on October 1, 2020.

Enhanced prudential standards and early remediation requirements

As enacted in 2010, the Dodd-Frank Act required the Federal Reserve to impose EPSs upon BHCs, like KeyCorp, with at least $50 billion in total consolidated assets. Prudential standards were required to include enhanced risk-based capital requirements and leverage limits, liquidity requirements, risk-management and risk committee requirements, resolution plan requirements, credit exposure report requirements, single counterparty credit limits (“SCCL”), supervisory and company-run stress test requirements and, for certain financial companies, a debt-to-equity limit. Early remediation requirements were required to include limits on capital distributions, acquisitions, and asset growth in early stages of financial decline and capital restoration plans, capital raising requirements, limits on transactions with affiliates, management changes, and asset sales in later stages of financial decline, which would be triggered by forward-looking indicators including regulatory capital and liquidity measures.

The resolution plan requirements were implemented by a joint final rule adopted by the Federal Reserve and FDIC in 2011 and were revised by a joint final rule adopted by the Federal Reserve and FDIC in 2019. In 2011, the Federal Reserve also issued a proposal to implement the stress test, early remediation, and SCCL requirements. However, when that proposal was adopted as a final rule in 2012, it included only the stress test requirements and not the SCCL or early remediation requirements.
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In March 2014, the Federal Reserve published a final rule to implement certain of the EPSs required under the Dodd-Frank Act, including: (i) the incorporation of the Regulatory Capital Rules through the Federal Reserve’s previously finalized rules on capital planning and stress tests; (ii) liquidity requirements; (iii) the risk management framework, the risk committee, and the chief risk officer as well as the corporate governance requirements as they relate to liquidity risk management; and (iv) a 15-to-1 debt-to-equity limit for companies that the FSOC determines pose a “grave threat” to U.S. financial stability. KeyCorp was required to comply with the final rule starting on January 1, 2015.

EGRRCPA, which was enacted on May 24, 2018, raised, from $50 billion to $250 billion, the asset threshold above which the Federal Reserve is required to apply EPSs to BHCs. EGRRCPA gave the Federal Reserve the authority, following notice and comment procedures, to continue to apply EPSs to any BHCs having at least $100 billion but less than $250 billion in total consolidated assets (like KeyCorp). Also, this statute requires the Federal Reserve to continue to conduct periodic stress tests of BHCs with assets between $100 billion and $250 billion (like KeyCorp), and the requirement for a publicly traded BHC to have a risk committee continues to apply if a BHC has assets of at least $50 billion.

On June 14, 2018, the Federal Reserve issued a final rule establishing SCCL requirements for BHCs with $250 billion or more in total consolidated assets. The final rule does not apply to KeyCorp. The Federal Reserve has taken no further action on the early remediation requirements proposed in 2011.

In one of the Tailoring Rules issued in October 2019 to implement EGRRCPA, the Federal Reserve amended certain of its rules governing EPSs to apply tailored regulatory standards to large BHCs in each of the four risk-based categories of institutions described in the Tailoring Rules. Based on Key’s analysis of the Tailoring Rules, KeyCorp believes that it is a Category IV Firm, the least restrictive of these categories. The Tailoring Rules are discussed further under the headings “Regulatory capital requirements - Liquidity requirements” and “Regulatory capital requirements - Capital planning and stress testing.”

Bank transactions with affiliates

Federal banking law and regulation imposes qualitative standards and quantitative limitations upon certain transactions by a bank with its affiliates, including the bank’s parent BHC and certain companies the parent BHC may be deemed to control for these purposes. Transactions covered by these provisions must be on arm’s-length terms, and cannot exceed certain amounts that are determined with reference to the bank’s regulatory capital. Moreover, if the transaction is a loan or other extension of credit, it must be secured by collateral in an amount and quality expressly prescribed by statute, and if the affiliate is unable to pledge sufficient collateral, the BHC may be required to provide it. These provisions significantly restrict the ability of KeyBank to fund its affiliates, including KeyCorp, KBCM, and KeyCorp’s nonbanking subsidiaries engaged in making merchant banking investments (and certain companies in which these subsidiaries have invested).

Provisions added by the Dodd-Frank Act expanded the scope of: (i) the definition of affiliate to include any investment fund having any bank or BHC-affiliated company as an investment adviser; (ii) credit exposures subject to the prohibition on the acceptance of low-quality assets or securities issued by an affiliate as collateral, the quantitative limits, and the collateralization requirements to now include credit exposures arising out of derivative, repurchase agreement, and securities lending/borrowing transactions; and (iii) transactions subject to quantitative limits to now also include credit collateralized by affiliate-issued debt obligations that are not securities. In addition, these provisions require that a credit extension to an affiliate remain secured in accordance with the collateral requirements at all times that it is outstanding, rather than the previous requirement of only at the inception or upon material modification of the transaction. These provisions also raise significantly the procedural and substantive hurdles required to obtain a regulatory exemption from the affiliate transaction requirements. While these provisions became effective on July 21, 2012, the Federal Reserve has not yet issued a proposed rule to implement them.

Supervision and governance

On November 2, 2018, the Federal Reserve announced that it is adopting a new supervisory rating system for large financial institutions, including BHCs with total consolidated assets of $100 billion or more (like KeyCorp) (“LFI Rating System”), in order to align the Federal Reserve’s rating system with the post-crisis supervisory programs for these firms. The LFI Rating System will provide a supervisory evaluation of whether an institution possesses sufficient operational strength and resilience to maintain safe and sound operations through a range of conditions
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and will assess an institution’s capital planning and positions, liquidity risk management and positions, and governance and controls. Institutions subject to the LFI Rating System will be rated using the following scale: Broadly Meets Expectations, Conditionally Meets Expectations, Deficient-1, and Deficient-2, with the Conditionally Meets Expectations rating intended to be used as a transitory rating to allow an institution time to remediate a concern identified during the supervisory evaluation. The Federal Reserve assigned initial ratings under the LFI Rating System in 2019 to institutions that are subject to the Large Institution Supervision Coordinating Committee framework (excluding KeyCorp) and assigned initial ratings in 2020 for all other large financial institutions subject to this rating system (including KeyCorp).

The governance and controls component of the LFI Rating System is the subject of two separate, but related proposals: (i) proposed guidance regarding supervisory expectations for boards of directors of large financial institutions; and (ii) proposed guidance regarding core principles for effective senior management, business management, and independent risk management and controls for large financial institutions. The proposed guidance regarding supervisory expectations for boards of directors (published by the Federal Reserve on August 3, 2017) identifies the attributes of effective boards of directors that would be used by an examiner to evaluate an institution’s governance and controls. The proposal also clarifies that for all institutions supervised by the Federal Reserve, most supervisory findings should be communicated to the organization’s senior management for corrective action and not its board of directors. In addition, the proposal identifies existing supervisory expectations for boards of directors set forth in Federal Reserve Supervision and Regulation Letters that could be eliminated or revised. The Federal Reserve extended the comment period for the proposed guidance regarding supervisory expectations for boards of directors until February 15, 2018.

On January 4, 2018, the Federal Reserve released the final proposal related to the LFI Rating System - the proposed guidance regarding core principles for effective senior management, business management, and independent risk management and controls for large financial institutions. This guidance would support the supervisory evaluation under the governance and controls component of the LFI Rating System, together with the above-mentioned guidance regarding the effectiveness of a firm’s board of directors. In general, the guidance proposes core principles for effective senior management, business line management, and the independent risk management and control function. The guidance encourages firms to establish a governance structure with appropriate levels of independence and stature, by appointing a Chief Risk Officer and a Chief Audit Officer. Finally, the guidance emphasizes the importance of independent risk management, internal controls, and internal audit, and establishes principles that firms should use to establish or augment those management and control frameworks. Comments on this proposal were due by March 15, 2018.

Community Reinvestment Act

The Community Reinvestment Act (“CRA”) was enacted in 1977 to encourage depository institutions to help meet the credit needs of the communities that they serve, including low- and moderate-income (“LMI”) neighborhoods, consistent with the institutions’ safe and sound operations. The CRA requires the federal banking agencies to assess the record of each institution that they supervise in meeting the credit needs of its entire community, including LMI neighborhoods.

On May 20, 2020, the OCC issued a final rule to revise the agency’s CRA regulation to strengthen and modernize the framework by which the OCC assesses a bank’s CRA performance. The OCC stated that it was doing so in order to make the CRA regulatory framework more objective, transparent, consistent in application, and reflective of changes in banking and thereby better achieve the statutory purpose of encouraging banks to serve the needs of their communities, particularly LMI neighborhoods and other communities that have been underserved. The final rule (i) clarifies and expands the activities that qualify for CRA credit; (ii) updates the definition of the assessment areas where activities are evaluated for CRA purposes; (iii) creates a more consistent and objective method for evaluating CRA performance; and (iv) provides for more timely and transparent CRA-related data collection, recordkeeping, and reporting. The OCC indicated that it was deferring to a future rulemaking the decision for how to calibrate the thresholds, benchmarks, and minimums used in the rule to determine the level of performance necessary for a bank to achieve a specific performance rating. The final rule became effective on October 1, 2020. Large national banks, like KeyBank, are required to comply with the rule by January 1, 2023.

On September 21, 2020, the Federal Reserve issued an Advance Notice of Proposed Rulemaking (“ANPR”) requesting public comment on ways to modernize CRA regulations by strengthening, clarifying, and tailoring them to reflect the current banking landscape and better achieve the core purpose of the CRA. The ANPR seeks public feedback on ways to evaluate how banks meet the needs of LMI communities and address inequities in credit
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access. When it issued the ANPR, the Federal Reserve said that it hoped the ANPR would provide a foundation for the federal banking agencies to come together on a consistent approach to CRA regulation that has broad support among all stakeholders. Comments are due by February 16, 2021. If the federal banking agencies agree on a consistent approach to revising their CRA regulations, KeyBank will be required to comply with the revised regulations.

On November 24, 2020, the OCC requested public comment on an NPR setting forth the OCC’s proposed approach for determining the benchmarks, thresholds, and minimums that would be used in assessing a bank’s performance under the general performance standards contained in the OCC’s 2020 final CRA rule. The proposal also explains how the OCC would assess a significant decline in a bank’s CRA activities following the initial establishment of the benchmarks, thresholds, and minimums. Further, the proposal would make clarifying and technical amendments to the 2020 final CRA rule. Comments on the NPR are due by February 2, 2021. On December 15, 2020, the OCC published a notice requesting comment on an information collection survey that the OCC would require banks subject to the CRA general performance standards to complete. The OCC said that it intends to use the bank-specific data that it collects from this survey to set the benchmarks, thresholds, and minimums that will correspond to the presumptive ratings under the CRA rule. Comments on this notice are due by February 16, 2021.
Control standards

On January 30, 2020, the Federal Reserve adopted a final rule setting forth a new, comprehensive framework for determining control under the BHCA and the Home Owners’ Loan Act. The final rule simplifies and provides greater transparency regarding the standards used by the Federal Reserve to determine whether one company has control over another company. The final rule codifies existing Federal Reserve precedents on control and makes certain targeted adjustments to these precedents. The final rule provides a tiered framework that looks at the size of an investing company’s voting and total equity investment in another company along with a variety of other factors, including board representation, officer and employee interlocks, and the existence of business relationships between the companies. By providing greater clarity regarding the standards that will be applied for control determinations, the final rule may facilitate (i) BHCs making minority investments in nonbank companies; and (ii) nonbank investors taking minority stakes in banking organizations. The final rule became effective September 30, 2020.

Regulatory developments concerning COVID-19

Federal, state, and local governments have adopted various statutes, rules, regulations, orders, and guidelines in order to address the COVID-19 pandemic and the adverse economic effects of this pandemic on individuals, families, businesses, and governments. Financial institutions, including Key, are affected by many of these measures, including measures that are broadly applicable to businesses operating in the communities where Key does business. Financial services firms, like other businesses, are required to operate in a manner that seeks to protect the health and safety of their customers and employees.

During the COVID-19 crisis, the federal banking agencies issued a number of statements encouraging financial institutions to meet the financial needs of their customers and have taken steps to provide financial institutions with additional flexibility to meet their customers’ needs. Certain of these steps are discussed above under the headings “Regulatory capital requirements — Recent regulatory capital-related developments” and “Regulatory capital requirements — Capital planning and stress testing.” In addition, the federal banking agencies along with state bank regulators issued an interagency statement on March 22, 2020, addressing loan modifications that are made by financial institutions for borrowers affected by the COVID-19 crisis. The agencies stated that short-term loan modifications made on a good faith basis in response to COVID-19 for borrowers who were current prior to any relief do not need to be categorized as TDRs and that financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral.

The CARES Act, enacted on March 27, 2020, contains a number of provisions that affect banking organizations. The CARES Act provides funding for various programs under which the federal government will lend to, guarantee loans to, or make investments in, businesses. Banking organizations are expected to play a role in some of these programs, and when they do so, they will be subject to certain requirements. One of these programs is the PPP, a program administered by the Small Business Administration (the “SBA”) to provide loans to small businesses for payroll and other basic expenses during the COVID-19 crisis. The loans can be made by SBA-certified lenders and are 100% guaranteed by the SBA. The loans are eligible to be forgiven if certain conditions are satisfied, in which event the SBA will make payment to the lender for the forgiven amounts. KeyBank has participated in the PPP as a lender.
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The CARES Act also authorizes temporary changes to certain provisions applicable to banking organizations. Among other changes, the CARES Act gives financial institutions the right to elect to suspend GAAP principles and regulatory determinations for loan modifications relating to COVID-19 that would otherwise be categorized as TDRs from March 1, 2020, through the earlier of December 31, 2020, or 60 days after the COVID-19 national emergency ends. In addition, the CARES Act requires mortgage servicers to grant, on a borrower’s request, forbearance for up to 180 days (which can be extended for an additional 180 days) on a federally-backed single-family mortgage loan or forbearance for up to 30 days (which can be extended for two additional 30-day periods) on a federally-backed multi-family mortgage loan when the borrowers experience financial hardship as a result of the COVID-19 emergency.

On April 3, 2020, federal banking agencies along with state bank regulators issued a joint statement indicating that the agencies do not plan to take supervisory or enforcement action against mortgage servicers for delays in taking loss-mitigation actions or sending notices required by the mortgage servicing rules if they provide short-term forbearance on mortgage loans to borrowers facing hardships relating to the COVID-19 emergency, including forbearance provided in accordance with the CARES Act, provided that the mortgage servicers make good faith efforts to take these actions and send these notices within a reasonable time.

On April 7, 2020, the federal banking agencies, in consultation with state bank regulators, issued an interagency statement clarifying the interaction between (i) their earlier statement discussing whether loan modifications relating to COVID-19 need to be treated as TDRs; and (ii) the CARES Act provision on this subject. In this interagency statement, the agencies also said that when exercising supervisory and enforcement responsibility with respect to consumer protection requirements, they will take into account the unique circumstances impacting borrowers and institutions resulting from the COVID-19 emergency and that they do not expect to take a consumer compliance public enforcement action against an institution, provided that the circumstances were related to this emergency and the institution made good faith efforts to support borrowers and comply with the consumer protection requirements and addressed any needed corrective action.

The Federal Reserve has established several lending facilities that are intended to support the flow of credit to households, businesses, and governments. One of these facilities is the Paycheck Protection Program Liquidity Facility (“PPPLF”) which was set up to allow the Federal Reserve Banks to extend credit to financial institutions that originate PPP loans, taking the loans as collateral at face value. On April 9, 2020, the federal banking agencies issued an interim final rule to allow banking organizations to neutralize the effect of PPP loans financed under the PPPLF on the leverage capital ratios of these organizations. On September 29, 2020, the federal banking agencies announced their adoption of this interim final rule as a final rule. In addition, on June 22, 2020, the FDIC issued a final rule that mitigates the impact of PPP lending on banks’ deposit insurance assessments. Also, in accordance with the CARES Act, a PPP loan will be assigned a risk weight of zero percent under the federal banking agencies’ risk-based capital rules.

On June 23, 2020, the federal banking agencies, in conjunction with state bank regulators, issued interagency examiner guidance outlining supervisory principles for assessing the safety and soundness of banks given the ongoing impact of the COVID-19 pandemic. The agencies stated that they will consider the unique, evolving, and potentially long-term nature of the issues that banks are confronting and will exercise appropriate flexibility in their supervisory response. The agencies said that they will continue to assess institutions in accordance with existing agency policies and procedures and will consider whether a bank’s management has managed risk appropriately, including taking appropriate actions in response to stresses caused by the COVID-19 pandemic.

The Consolidated Appropriations Act, 2021 (“CAA”), enacted on December 27, 2020, contains a number of provisions that affect banking organizations. Among other things, the CAA extends the provision in the CARES Act that allows financial institutions to suspend GAAP principles and regulatory determinations for loan modifications relating to COVID-19 that would otherwise be categorized as TDRs through the earlier of January 1, 2022, or 60 days after the COVID-19 national emergency ends. The CAA also provides additional funding for SBA-guaranteed loans to small businesses under the PPP (discussed above) and makes a number of changes to this program, including the expansion of the pool of eligible borrowers and the addition of certain categories of expenses that will be eligible for forgiveness. KeyBank participates in the PPP as a lender.

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ITEM 1A.  RISK FACTORS

As a financial services organization, we are subject to a number of risks inherent in our transactions and present in the business decisions we make. Described below are the primary risks and uncertainties that if realized could have a material and adverse effect on our business, financial condition, results of operations or cash flows, and our access to liquidity. The risks and uncertainties described below are not the only risks we face.

Our ERM program incorporates risk management throughout our organization to identify, understand, and manage the risks presented by our business activities. Our ERM program identifies Key’s major risk categories as: credit risk, compliance risk, operational risk, liquidity risk, market risk, reputation risk, strategic risk, and model risk. These risk factors, and other risks we may face, are discussed in more detail in other sections of this report.

I.  Credit Risk

We have concentrated credit exposure in commercial and industrial loans, commercial real estate loans, and commercial leases.

As of December 31, 2020, approximately 71% of our loan portfolio consisted of commercial and industrial loans, commercial real estate loans, including commercial mortgage and construction loans, and commercial leases. These types of loans are typically larger than single family residential real estate loans and other types of consumer loans and have a different risk profile. The deterioration of a larger loan or a group of loans in this category could cause an increase in nonperforming loans, which could result in lower earnings from these loans, additional provision for loan and lease losses, and ultimately an increase in loan losses.

Should the fundamentals of the commercial real estate market deteriorate, our financial condition and results of operations could be adversely affected.

The strong recovery in commercial real estate over the past several years, in particular the multifamily property sector, has contributed to a surge in investment and development activity. While the COVID-19 pandemic has impacted the commercial real estate market, property values have remained relatively stable. Development and construction continue, but at muted levels, and deliveries of additional units into the market have been supported. Oversupply is a concern in certain urban and gateway markets. However, our exposures in those markets are limited. The most severely impacted commercial real estate segments have been in hospitality and retail. However, monthly collections have improved. Key’s office and retail exposures are 6% of our total commercial real estate exposure. Substantial deterioration in property market fundamentals could negatively impact our portfolio, with a large portion of our clients active in real estate but in the higher performing multifamily space. A correction in the real estate markets could impact the ability of borrowers to make debt service payments on loans or to refinance the loans at maturity. A relatively small portion of our commercial real estate loans are construction loans. New construction and value-add or rehabilitation construction projects are not fully leased at loan origination. These properties typically require additional leasing through the life of the loan to provide cash flow to support debt service payments. If property market fundamentals deteriorate sharply, performance under existing leases could deteriorate and the execution of new leases could slow, compromising the borrower’s ability to cover debt service payments.

We are subject to the risk of defaults by our loan counterparties and clients.

Many of our routine transactions expose us to credit risk in the event of default of our counterparty or client. Our credit risk may be exacerbated when the collateral held cannot be realized upon or is liquidated at prices insufficient to recover the full amount of the loan or derivative exposure due to us. In deciding whether to extend credit or enter into other transactions, we may rely on information furnished by or on behalf of counterparties and clients, including financial statements, credit reports and other information. We may also rely on representations of those counterparties, clients, or other third parties as to the accuracy and completeness of that information. The inaccuracy of that information or those representations affects our ability to accurately evaluate the default risk of a counterparty or client. Given the Dodd-Frank legislative mandate to centrally clear eligible derivative contracts, we rely on central clearing counterparties to remain open and operationally viable at all times. The possibility of a large member failure or a cybersecurity breach could result in a counterparty or client disruption.

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Various factors may cause our allowance for loan and lease losses to increase.

We maintain an ALLL (a reserve established through a provision for loan and lease losses charged to expense) that represents our estimate of losses based on our evaluation of risks within our existing portfolio of loans. The level of the allowance at December 31, 2020 represents management’s estimate of expected credit losses over the contractual life of our existing loan portfolio. The determination of the appropriate level of the ALLL inherently involves a degree of subjectivity and requires that we make significant estimates of current credit risks and current trends and reasonable and supportable forecasts of future economic conditions, all of which may undergo frequent and material changes. Changes in economic conditions affecting borrowers, the softening of certain macroeconomic variables that we are more susceptible to, such as GDP, unemployment, corporate bond rates, household income, 30 year mortgage rates and real estate values, along with new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may indicate the need for an increase in the ALLL.

Declining asset prices could adversely affect us.

During the Great Recession, the volatility and disruption that the capital and credit markets experienced reached extreme levels. This severe market disruption led to the failure of several substantial financial institutions, which caused the credit markets to constrict and caused a widespread liquidation of assets. These asset sales, along with asset sales by other leveraged investors, including some hedge funds, rapidly drove down prices and valuations across a wide variety of traded asset classes. Asset price deterioration has a negative effect on the valuation of certain of the asset categories represented on our balance sheet and reduces our ability to sell assets at prices we deem acceptable. The current recession has not had significant impacts on collateral value, continued recessionary pressures could reverse recent stable trends in asset prices.

The COVID-19 global pandemic could result in a deterioration of asset quality and an increase in credit losses .

The global pandemic has shut down large portions of the U.S. economy and has negatively impacted many of our customers. As a result, many businesses have or will have lower revenues and many consumers will have lower income. This negative impact on customers’ cash flow could result in their inability to repay loans which could have a negative impact on our asset quality. Although the rating degradation to date has stabilized, many customers have requested and have been granted hardship relief in the form of payment deferrals and modifications as well as loans through the CARES Act. If customers are unable to repay their loans in a timely manner following hardship relief, it could result in further deterioration of asset quality, an increase in delinquency, some reversal of accrued interest income, and some increase in loan losses. As a result, we increased our loan loss reserve in the first, second and third quarters of 2020. The continued impact of the pandemic could result in a further increase to our loan loss reserve.

Oil prices have declined significantly, which could lead to increased credit losses in our oil and gas loan portfolio .

The oil market faced a drop-off in demand due to the impact of the COVID-19 global pandemic on much of the global economy. The decline in demand coupled with insufficient storage capacity for oil caused oil prices to decline significantly. As a result, some oil companies began to halt production and associated exploration in 2020. While oil prices have recovered from their low point in 2020, the oil and gas sector continues to suffer from low oil prices and as a result, companies in that sector will have lower revenues and cash flows. Some oil companies have been forced to seek bankruptcy protection as well. Our oil and gas loan portfolio represented only 2.8% of our total commercial loan portfolio at December 31, 2020, and our exposure is primarily reserve-based, with approximately half tied to natural gas which has shown better price performance. However, even with our limited exposure, the negative impact of low oil prices could result in increased credit losses.

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II.  Compliance Risk

We are subject to extensive government regulation, supervision, and tax legislation.

As a financial services institution, we are subject to extensive federal and state regulation, supervision, and tax legislation. Banking regulations are primarily intended to protect depositors’ funds, the DIF, consumers, taxpayers, and the banking system as a whole, not our debtholders or shareholders. These regulations increase our costs and affect our lending practices, capital structure, investment practices, dividend policy, ability to repurchase our common shares, and growth, among other things.

KeyBank and KeyCorp remain covered institutions under the Dodd-Frank Act’s heightened prudential standards and regulations, including its provisions designed to protect consumers from financial abuse. Like similarly situated institutions, Key undergoes routine scrutiny from bank supervisors in the examination process and is subject to enforcement of regulations at the federal and state levels, particularly with respect to consumer banking-related practices as well as compliance with AML, BSA and Office of Foreign Assets Control efforts. Federal rulemaking bodies continue to pass new, or modifications to, significant regulations with upcoming effective dates. There has also been an increase in state legislative activity, particularly in areas such as student lending and privacy. As new privacy-related laws and regulations, such as the California Consumer Privacy Act, are implemented in jurisdictions in which KeyBank operates, the time and resources needed for us to comply with such laws and regulations, as well as our potential liability for noncompliance and reporting obligations in the case of data breaches, may significantly increase. Compliance with these laws and regulations may require us to change our policies, procedures, and technology for information security and segregation of data, which could, among other things, make us more vulnerable to operational failures, and subject us to monetary penalties for breach of such laws and regulations. As a result, some uncertainty remains as to the aggregate impact upon Key of significant regulations.
Changes to existing statutes and regulations, and taxes (including industry-specific taxes and surcharges), or their interpretation or implementation could affect us in substantial and unpredictable ways. These changes may subject us to additional costs and increase our litigation risk should we fail to appropriately comply. Such changes may also impact consumer behavior, limit the types of financial services and products we may offer, affect the investments we make, and change the manner in which we operate.

Certain federal regulations have been in existence for decades without modification to account for modern banking practices, such as digital delivery of products and services, which can create challenges in execution and in the examination process. Emerging technologies, such as cryptocurrencies, could limit KeyBank’s ability to track the movement of funds. KeyBank’s ability to comply with BSA/AML and other regulations is dependent on its ability to improve detection and reporting capabilities and reduce variation in control processes and oversight accountability.

Additionally, federal banking law grants substantial enforcement powers to federal banking regulators. This enforcement authority includes, among other things, the ability to assess civil money penalties, fines, or restitution, to issue cease and desist or removal orders, and to initiate injunctive actions against banking organizations and affiliated parties. These enforcement actions may be initiated for violations of laws and regulations, for practices determined to be unsafe or unsound, or for practices or acts that are determined to be unfair, deceptive, or abusive. Failure to comply with these and other regulations, and supervisory expectations related thereto, may result in fines, penalties, lawsuits, regulatory sanctions, reputational damage, or restrictions on our business.

For more information, see “Supervision and Regulation” in Item 1 of this report.

Changes in accounting policies, standards, and interpretations could materially affect how we report our financial condition and results of operations.

The FASB periodically changes the financial accounting and reporting standards governing the preparation of Key’s financial statements. Additionally, those bodies that establish and/or interpret the financial accounting and reporting standards (such as the FASB, SEC, and banking regulators) may change prior interpretations or positions on how these standards should be applied. These changes can be difficult to predict and can materially affect how Key records and reports its financial condition and results of operations. In some cases, Key could be required to retroactively apply a new or revised standard, resulting in changes to previously reported financial results.

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III.  Operational Risk

We are subject to a variety of operational risks.

In addition to the other risks discussed in this section, we are subject to operational risk, which represents the risk of loss resulting from human error, inadequate or failed internal processes, internal controls, systems, and external events. Operational risk includes the risk of fraud by employees or others outside of Key, clerical and record-keeping errors, nonperformance by vendors, threats from cyber activity, and computer/telecommunications malfunctions. Fraudulent activity has escalated, become more sophisticated, and is ever evolving as there are more options to access financial services. For instance, in our Form 8-K filed July 16, 2019, we disclosed that on or about July 9, 2019, we discovered fraudulent activity associated with transactions conducted in the third quarter of 2019 by a business customer of KeyBank. This fraudulent activity resulted in $139 million of net loan charge-offs in 2019. Operational risk also encompasses compliance and legal risk, which is the risk of loss from violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards, as well as the risk of our noncompliance with contractual and other obligations. We are also exposed to operational risk through our outsourcing arrangements, and the effect that changes in circumstances or capabilities of our outsourcing vendors can have on our ability to continue to perform operational functions necessary to our business, such as certain loan processing functions. For example, breakdowns or failures of our vendors’ systems or employees could be a source of operational risk to us. Resulting losses from operational risk could take the form of explicit charges, increased operational costs (including remediation costs), harm to our reputation, inability to secure insurance, litigation, regulatory intervention or sanctions, or foregone business opportunities.

Our information systems may experience an interruption or breach in security.

We rely heavily on communications, information systems (both internal and provided by third parties), and the internet to conduct our business. Our business is dependent on our ability to process and monitor large numbers of daily transactions in compliance with legal, regulatory, and internal standards and specifications. In addition, a significant portion of our operations relies heavily on the secure processing, storage, and transmission of personal and confidential information, such as the personal information of our customers and clients. These risks may increase in the future as we continue to increase mobile payments and other internet-based product offerings, expand our internal usage of web/cloud-based products and applications, and maintain and develop new relationships with third and fourth party providers. In addition, our ability to extend protections to customers’ information to individual customer devices is limited, especially if the customers willingly provide third parties access to their devices or information.

In the event of a failure, interruption, or breach of our information systems or that of a third party that provides services to us or our customers, we may be unable to avoid impact to our customers. Such a failure, interruption, or breach could result in legal liability, remediation costs, regulatory action, or reputational harm. Other U.S. financial service institutions and companies have reported breaches, some severe, in the security of their websites or other systems and several financial institutions, including Key, experienced significant distributed denial-of-service attacks, some of which involved sophisticated and targeted attacks intended to disable or degrade service, or sabotage systems. Other attacks have attempted to obtain unauthorized access to confidential information, hold for ransom, or alter or destroy data, often through the introduction of computer viruses or malware, phishing, cyberattacks, credential stuffing, and other means. In 2020, many companies and U.S. government organizations were victims of a sophisticated and targeted supply chain attack on the SolarWinds Orion software. While Key does not utilize the SolarWinds software products, some of our vendors do. To the extent that we use third parties to provide services to our clients, we seek to minimize the risk by performing due diligence and monitoring the third party, but we cannot control all of the risks at these third parties. Should an adverse event affecting another company’s systems occur, we may not have indemnification or other protection from the other company sufficient to fully compensate us or otherwise protect us or our clients from the consequences.

In addition, our customers routinely use Key-issued credit and debit cards to pay for transactions conducted with businesses in person and over the internet. If the business’s systems that process or store debit or credit card information experience a security breach, our card holders may experience fraud on their card accounts. We may suffer losses associated with such fraudulent transactions, as well as for other costs, such as replacing impacted cards. Key also provides card transaction processing services to some merchant customers under agreements we have with payment networks such as Mastercard. Under these agreements, we may be responsible for certain losses and penalties if one of our merchant customers suffers a data breach.

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We also face risks related to the increasing interdependence and interconnectivity of financial entities and technology systems. A technology failure, cyberattack or other security breach that significantly compromises the systems of one or more financial parties or service providers could have a material impact on counterparties or market participants, including us. Any third-party technology failure, cyberattack, or security breach could adversely affect our ability to effect transactions, service clients, or otherwise operate our business.

To date, none of these efforts have had a material adverse effect on our business or operations or resulted in any material disruption of our operations or material harm to our customers. Such security attacks can originate from a wide variety of sources/malicious actors, including, but not limited to, persons who constitute an insider threat, who are involved with organized crime, or who may be linked to terrorist organizations or hostile foreign governments. Those same parties may also attempt to fraudulently induce employees, customers, or other users of our systems to disclose sensitive information in order to gain access to our data or that of our customers or clients through social engineering, phishing, and other methods. Our security systems may not be able to protect our information systems from similar attacks due to the rapid evolution and creation of sophisticated cyberattacks. We are also subject to the risk that a malicious actor or our employees may intercept and/or transmit or otherwise misuse unauthorized confidential or proprietary information. An interception, misuse, or mishandling of personal, confidential, or proprietary information being sent to or received from a customer or third party could result in legal liability, remediation costs, regulatory action, and reputational harm. Over the last few years, several large companies have disclosed that they suffered substantial data security breaches, compromising millions of user accounts and credentials. To date, our losses and costs related to these breaches have not been material, but other similar events in the future could have a significant impact on us.

We have incurred and will continue to incur significant expense in an effort to improve the reliability of our systems and their security against external and internal threats. Nonetheless, there remains the risk that one or more adverse events might occur. If one does occur, we might not be able to remediate the event or its consequences timely or adequately. While we do maintain information security risk insurance, losses from a major interruption may exceed our coverage.

We rely on third parties to perform significant operational services for us.

Third parties perform significant operational services on our behalf. Additionally, some of our third parties outsource aspects of their operations to other third parties (commonly referred to as “fourth parties”). These parties are subject to similar risks as Key relating to cybersecurity and breakdowns or failures of their own systems, internal processes and controls, or employees. One or more of these third parties may experience a cybersecurity event or operational disruption and, if any such event does occur, it may not be adequately addressed, either operationally or financially, by such third party. Certain of these third parties may have limited indemnification obligations or may not have the financial capacity to satisfy their indemnification obligations. Financial or operational difficulties of a third party could also impair our operations if those difficulties interfere with such third party’s ability to serve us. Additionally, some of our outsourcing arrangements are located overseas and, therefore, are subject to risks unique to the regions in which they operate. If a critical third party is unable to meet our needs in a timely manner or if the services or products provided by such third party are terminated or otherwise delayed and if we are not able to identify or develop alternative sources for these services and products quickly and cost-effectively, it could have a material adverse effect on our business. Additionally, regulatory guidance adopted by federal banking regulators related to how banks select, engage, and manage their third parties affects the circumstances and conditions under which we work with third parties and the cost of managing such relationships.

We are subject to claims and litigation, which could result in significant financial liability and/or reputational risk.

From time to time, customers, vendors, or other parties may make claims and take legal action against us. We maintain reserves for certain claims when deemed appropriate based upon our assessment that a loss is probable, estimable, and consistent with applicable accounting guidance. At any given time, we have a variety of legal actions asserted against us in various stages of litigation. Resolution of a legal action can often take years. Whether any particular claims and legal actions are founded or unfounded, if such claims and legal actions are not resolved in our favor, they may result in significant financial liability and adversely affect how the market perceives us and our products and services as well as impact customer demand for those products and services.

We are also involved, from time to time, in other reviews, investigations, and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding our business, including, among other things, accounting,
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compliance, and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions, or other relief. The number and risk of these investigations and proceedings has increased in recent years in the financial services industry due to legal changes to the consumer protection laws provided for by the Dodd-Frank Act and the creation of the CFPB.

Our controls and procedures may fail or be circumvented, and our methods of reducing risk exposure may not be effective.

We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. We also maintain an ERM program designed to identify, measure, monitor, report, and analyze our risks. Additionally, our internal audit function provides an independent assessment and testing of Key’s internal controls, policies, and procedures. Any system of controls and any system to reduce risk exposure, however well designed, operated, and tested, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. The systems may not work as intended or be circumvented by employees, third parties, or others outside of Key. Additionally, instruments, systems, and strategies used to hedge or otherwise manage exposure to various types of market compliance, credit, liquidity, operational, and business risks and enterprise-wide risk could be less effective than anticipated. As a result, we may not be able to effectively or fully mitigate our risk exposures in particular market environments or against particular types of risk.

Climate change, severe weather, global pandemics, natural disasters, acts of war or terrorism, and other external events could significantly impact our business.

Natural disasters, including severe weather events of increasing strength and frequency due to climate change, acts of war or terrorism, global pandemics, and other adverse external events could have a significant impact on our ability to conduct business or upon third parties who perform operational services for us. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing our loans, cause significant property damage, result in lost revenue, or cause us to incur additional expenses.

Additionally, potential future shutdowns of portions of the Federal government could negatively impact the financial performance of certain customers and could negatively impact customers’ future access to certain loan and guaranty programs.

The COVID-19 global pandemic has resulted in increased operational risks.

The COVID-19 pandemic has resulted in heightened operational risks. Much of our workforce has been working remotely, and increased levels of remote access create additional cybersecurity risk and opportunities for cybercriminals to exploit vulnerabilities. Cybercriminals may increase their attempts to compromise business emails, including an increase in phishing attempts, and fraudulent vendors or other parties may view the pandemic as an opportunity to prey upon consumers and businesses during this time. Cybercriminals have also found new means of stealing identities and exploiting stolen identities during the pandemic. This has resulted in increased fraud losses to us and the financial services industry. The increase in online and remote banking activities may also increase the risk of fraud in certain instances. In addition, state and local orders and regulations regarding the conduct of in-person business operations may impact our ability to operate at normal levels and to restore operations to their pre-pandemic level for an unknown period of time. Separately, our third-party service providers have also been impacted by the pandemic and we have experienced some disruption to certain services performed by vendors. To date, these disruptions have not been material and we have developed solutions to work around these disruptions, but we may experience additional disruption in the future, which could adversely impact our business.

Our participation in the Paycheck Protection Program may subject us to increased regulatory scrutiny or litigation and could result in damage to our reputation.

We provided over 43,000 loans with over $8 billion in funding and were the seventh overall lender in the PPP in 2020. The PPP and many lenders that participated in the PPP have been the subject of much publicity and regular media stories. There have been lawsuits by borrowers and purported agents against lenders related to the program, and we have been the subject of litigation related to the PPP. Although such litigation has not been material to date, our participation in the program could result in increased exposure to litigation in the future. In addition, our practices and procedures related to the PPP could be scrutinized by government or regulatory agencies.
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Government or regulatory scrutiny or increased litigation could result in financial liability or damage to our reputation. This could also result in increased legal and compliance costs.

IV.  Liquidity Risk

Capital and liquidity requirements imposed by banking regulations require banks and BHCs to maintain more and higher quality capital and more and higher quality liquid assets.

Evolving capital standards resulting from the Dodd-Frank Act and the Regulatory Capital Rules adopted by our regulators have had and will continue to have a significant impact on banks and BHCs, including Key. For a detailed explanation of the capital and liquidity rules that became effective for us on a phased-in basis on January 1, 2015, see the section titled “Regulatory capital requirements” under the heading “Supervision and Regulation” in Item 1 of this report.

The Federal Reserve’s capital standards require Key to maintain more and higher quality capital and could limit our business activities (including lending) and our ability to expand organically or through acquisitions. They could also result in our taking steps to increase our capital that may be dilutive to shareholders or limit our ability to pay dividends or otherwise return capital to shareholders.

In addition, the liquidity standards require us to hold high-quality liquid assets, may require us to change our future mix of investment alternatives, and may impact future business relationships with certain customers. Additionally, support of liquidity standards may be satisfied through the use of term wholesale borrowings, which tend to have a higher cost than that of traditional core deposits.

Further, the Federal Reserve has detailed the processes that BHCs should maintain to ensure they hold adequate capital under severely adverse conditions and have ready access to funding before engaging in any capital activities. These rules could limit Key’s ability to make distributions, including paying out dividends or buying back shares. For more information, see the section titled “Regulatory capital requirements” under the heading “Supervision and Regulation” in Item 1 of this report.

Recently, certain regulatory rule changes related to tailoring outlined in EGRRCPA have been finalized. While marginal relief from certain capital and liquidity standards has been afforded to Key (such as relief from LCR compliance), overall capital and liquidity management practices and expectations will remain unchanged for the foreseeable future. Moreover, Key does not anticipate significant changes to its overall liquidity and capital levels or composition as a result of the final rules. Finally, additional guidance and rulemaking related to capital planning and stress testing have yet to be finalized and impacts resulting from these potential changes remain unknown.

Federal agencies’ actions to ensure stability of the U.S. financial system may have disruptive effects on us.

The federal government has taken unprecedented steps to provide stability to and confidence in the financial markets. For example, the Federal Reserve initiated a round of emergency interest rate cuts designed to mitigate some of the economic effects resulting from the pandemic. In the future, federal agencies may no longer support such initiatives. The discontinuation of such initiatives may have unanticipated or unintended impacts, perhaps severe, on the financial markets. These effects could include higher debt yields, a flatter or steeper slope to the yield curve, or unanticipated changes to quality spread premiums that may not follow historical relationships or patterns. In addition, new initiatives or legislation may not be implemented, or, if implemented, may not be adequate to counter any negative effects of discontinuing programs or, in the event of an economic downturn, to support and stabilize the economy.

We rely on dividends by our subsidiaries for most of our funds.

We are a legal entity separate and distinct from our subsidiaries. With the exception of cash that we may raise from debt and equity issuances, we receive substantially all of our funding from dividends by our subsidiaries. Dividends by our subsidiaries are the principal source of funds for the dividends we pay on our common and preferred stock and interest and principal payments on our debt. Federal banking law and regulations limit the amount of dividends that KeyBank (KeyCorp’s largest subsidiary) can pay. For further information on the regulatory restrictions on the payment of dividends by KeyBank, see “Supervision and Regulation” in Item 1 of this report.

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In the event KeyBank is unable to pay dividends to us, we may not be able to service debt, pay obligations, or pay dividends on our common or preferred stock. Such a situation could result in Key losing access to alternative wholesale funding sources. In addition, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.

We are subject to liquidity risk, which could negatively affect our funding levels.

Market conditions or other events could negatively affect our access to or the cost of funding, affecting our ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, or fund asset growth and new business initiatives at a reasonable cost, in a timely manner and without adverse consequences.
Although we maintain a liquid asset portfolio and have implemented strategies to maintain sufficient and diverse sources of funding to accommodate planned as well as unanticipated changes in assets, liabilities, and off-balance sheet commitments under various economic conditions (including a reduced level of wholesale funding sources), a substantial, unexpected, or prolonged change in the level or cost of liquidity could have a material adverse effect on us. If the cost effectiveness or the availability of supply in these credit markets is reduced for a prolonged period of time, our funding needs may require us to access funding and manage liquidity by other means. These alternatives may include generating client deposits, securitizing or selling loans, extending the maturity of wholesale borrowings, borrowing under certain secured borrowing arrangements, using relationships developed with a variety of fixed income investors, and further managing loan growth and investment opportunities. These alternative means of funding may result in an increase to the overall cost of funds and may not be available under stressed conditions, which would cause us to liquidate a portion of our liquid asset portfolio to meet any funding needs.

Our credit ratings affect our liquidity position.

The rating agencies regularly evaluate the securities issued by KeyCorp and KeyBank. The ratings of our long-term debt and other securities are based on a number of factors, including our financial strength, ability to generate earnings, and other factors. Some of these factors are not entirely within our control, such as conditions affecting the financial services industry and the economy and changes in rating methodologies. Changes in any of these factors could impact our ability to maintain our current credit ratings. A rating downgrade of the securities of KeyCorp or KeyBank could adversely affect our access to liquidity and could significantly increase our cost of funds, trigger additional collateral or funding requirements, and decrease the number of investors and counterparties willing to lend to us, reducing our ability to generate income.

The COVID-19 global pandemic may continue to cause uncertainty in markets and may result in an increase in our cost of funds.

The COVID-19 global pandemic has caused a great amount of uncertainty in markets, causing credit markets to seize and forcing companies, including our clients, to seek liquidity in the face of uncertain future cash flows. To the extent that clients’ funds are not used as working capital and not placed on deposit with KeyBank, we could be faced with funding significant draws of committed lending facilities, along with requests for new facilities from our clients. Clients may look to Key for additional funding vehicles should the capital markets become more unstable and illiquid. As clients use deposit balances to fund their businesses, this may put funding pressure on Key, which may cause us to leverage our secured funding sources or pay higher rates than normal for additional funding

V.  Market Risk

A worsening of the U.S. economy and volatile or recessionary conditions in the U.S. or abroad could negatively affect our business or our access to capital markets.

A worsening of economic and market conditions or downside shocks could result in adverse effects on Key and others in the financial services industry. The prolonged low-interest rate environment, despite a generally recovering economy, has presented a challenge for the industry, including Key, and affects business and financial performance.

In particular, we could face some of the following risks, and other unforeseeable risks, in connection with a downturn in the economic and market environment or in the face of downside shocks or a recession, whether in the United States or internationally:

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• A loss of confidence in the financial services industry and the debt and equity markets by investors, placing pressure on the price of Key’s common shares or decreasing the credit or liquidity available to Key;
• A decrease in consumer and business confidence levels generally, decreasing credit usage and investment or increasing delinquencies and defaults;
• A decrease in household or corporate incomes, reducing demand for Key’s products and services;
• A decrease in the value of collateral securing loans to Key’s borrowers or a decrease in the quality of Key’s loan portfolio, increasing loan charge-offs and reducing Key’s net income;
• A decrease in our ability to liquidate positions at acceptable market prices;
• The extended continuation of the current low-interest rate environment, continuing or increasing downward pressure to our net interest income;
• An increase in competition or consolidation in the financial services industry;
• Increased concern over and scrutiny of the capital and liquidity levels of financial institutions generally, and those of our transaction counterparties specifically;
• A decrease in confidence in the creditworthiness of the United States or other governments whose securities we hold; and
• An increase in limitations on or the regulation of financial services companies like Key.

We are subject to interest rate risk, which could adversely affect net interest income.

Our earnings are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions, the competitive environment within our markets, consumer preferences for specific loan and deposit products, and policies of various governmental and regulatory agencies, in particular, the Federal Reserve. Changes in monetary policy, including changes in interest rate controls being applied by the Federal Reserve, could influence the amount of interest we receive on loans and securities, the amount of interest we pay on deposits and borrowings, our ability to originate loans and obtain deposits, and the fair value of our financial assets and liabilities. If the Federal Reserve raises interest rates and begins to reverse pandemic-related stimulus programs, the behavior of national money market rate indices, the correlation of consumer deposit rates to financial market interest rates, and the setting of LIBOR rates may not follow historical relationships, which could influence net interest income and net interest margin.

Moreover, if the interest we pay on deposits and other borrowings increases at a faster rate than the interest we receive on loans and other investments, net interest income, and therefore our earnings, would be adversely affected. Conversely, earnings could also be adversely affected if the interest we receive on loans and other investments falls more quickly than the interest we pay on deposits and other borrowings.

Uncertainty surrounding the transition from LIBOR to an alternate reference rate may adversely affect our business.

On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority (the “Authority”), which regulates LIBOR, announced that the Authority intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. Subsequently, on November 30, 2020, ICE Benchmark Administration (IBA), the FCA-regulated and authorized administrator of LIBOR, announced that it would start a consultation process in December 2020, which was open for feedback through the end of January 2021, on its intention to cease US$ LIBOR. IBA intends that, subject to confirmation following its consultation, one-week and two-month US$ LIBOR settings will cease at December 31, 2021, and that the US$ LIBOR panel will cease at June 30, 2023, effectively ceasing all other US$ LIBOR tenors. A transition away from the widespread use of LIBOR to alternative rates is expected to occur before the end of 2021, as regulators have issued guidance indicating that new LIBOR originations should not extend beyond December 31, 2021. Although no consensus exists at this time as to what benchmark rate or rates may become accepted alternatives to LIBOR, in the United States, the Alternative Reference Rates Committee of the Federal Reserve and the Federal Reserve Bank of New York started in May 2018 to publish the Secured Overnight Finance Rate (“SOFR”) as an alternative to U.S. dollar LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight that is collateralized by U.S. treasury securities. While SOFR has been considered a likely alternative to LIBOR, issues remain as to its implementation, and given the IBA’s announcement noted above, it is uncertain whether new benchmarks may evolve and a different credit sensitive benchmark could instead become the market-accepted benchmark. Accordingly, whether SOFR will become a market-accepted alternative to LIBOR remains uncertain. At this time, it is not possible to predict the effect of the Authority’s announcement, IBA’s consultation, or other regulatory changes or announcements, any
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establishment of alternative reference rates, or any other reforms to LIBOR that may be enacted in the United Kingdom, the United States, or elsewhere. The uncertainty regarding the transition from LIBOR to another benchmark rate or rates could have adverse impacts on floating-rate obligations, loans, deposits, derivatives, and other financial instruments that currently use LIBOR as a benchmark rate and, ultimately, adversely affect KeyCorp’s financial condition and results of operations. The adverse impact could take various forms and is dependent upon certain factors outside of our control such as: timing of adoption by market forces of a new widely accepted LIBOR replacement, timing of LIBOR cessation, and counterparty acceptance of a new reference rate for both new and existing contracts, among others. Additionally, since LIBOR and any replacement reference rate may have significantly different attributes, it is difficult to predict the amount of increased costs associated with implementing the transition to a new reference rate, including costs relative to product changes, systems changes, compliance and operational oversight costs, and legal expenses, among others.

Our profitability depends upon economic conditions in the geographic regions where we have significant operations and in certain market segments in which we conduct significant business.

We have concentrations of loans and other business activities in geographic regions where our bank branches are located — Washington; Oregon/Alaska; Rocky Mountains; Indiana/Northwest Ohio/Michigan; Central/Southwest Ohio; East Ohio/Western Pennsylvania; Atlantic; Western New York; Eastern New York; and New England — and additional exposure to geographic regions outside of our branch footprint. Economic growth in the various regions where we operate has been uneven, and the health of the overall U.S. economy may differ from the economy of any particular geographic region. Adverse conditions in a geographic region such as inflation, unemployment, recession, natural disasters, or other factors beyond our control could impact the ability of borrowers in these regions to repay their loans, decrease the value of collateral securing loans made in these regions, or affect the ability of our customers in these regions to continue conducting business with us.

Additionally, a significant portion of our business activities are concentrated within the commercial real estate, healthcare, and utilities market segments. The profitability of some of these market segments depends upon the health of the overall economy, seasonality, the impact of regulation, and other factors that are beyond our control and may be beyond the control of our customers in these market segments.

An economic downturn in one or more geographic regions where we conduct our business, or any significant or prolonged impact on the profitability of one or more of the market segments with which we conduct significant business activity, could adversely affect the demand for our products and services, the ability of our customers to repay loans, the value of the collateral securing loans, and the stability of our deposit funding sources.

The soundness of other financial institutions could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. We have exposure to many different industries and counterparties in the financial services industries, and we routinely execute transactions with such counterparties, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, insurance companies, and other institutional clients. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. Defaults by one or more financial services institutions have led to, and may cause, market-wide liquidity problems and losses. Many of our transactions with other financial institutions expose us to credit risk in the event of default of a counterparty or client. In addition, our credit risk may be affected when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of our loan or derivatives exposure.

Less regulated and poorly capitalized non-bank financial institutions may be particularly vulnerable to asset quality deterioration as their borrower’s ability to service their obligations declines amid the pandemic. This could put additional stress on traditional lenders.

The impact of the COVID-19 global pandemic has resulted in economic disruption related to interest rate risk and market risk.

On March 15, 2020, the Federal Reserve lowered the Fed Funds Target Rate range to 0 to 25 basis points, down from 175 basis points at December 31, 2019. Other short-term rates, such as LIBOR, have declined as well due to liquidity stress in money markets. Because Key is positioned as modestly asset sensitive, declining interest rates will negatively impact our net interest income, assuming all loan and deposit volumes are held constant.
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Additionally, as it pertains to our trading activities (described in more detail in the “Market risk management” section within Management’s Discussion and Analysis), in a decreasing interest rate environment, our credit valuation adjustment (CVA) to derivative exposure generally increases due to the nature of our derivatives business model. The increase in derivatives exposure, combined with the credit spread widening that drives the market implied probability of default, increases our credit reserves. This increase in credit reserves had a negative impact on our earnings in the first quarter of 2020. The adverse impact of the COVID-19 global pandemic also caused market disruption in certain asset classes within our fixed income business. The temporary decrease in market liquidity along with the decrease in interest rates and spread widening had a negative impact on our earnings in the first quarter of 2020.

VI.  Reputation Risk

Damage to our reputation could significantly harm our businesses.

Our ability to attract and retain customers, clients, investors, and highly skilled management and employees is affected by our reputation. Public perception of the financial services industry declined as a result of the Great Recession. We faced increased public and regulatory scrutiny resulting from the financial crisis. Significant harm to our reputation can also arise from other sources, including employee misconduct, actual or perceived unethical behavior, litigation or regulatory outcomes, failing to deliver minimum or required standards of service and quality, compliance failures, disclosure of confidential information, significant or numerous failures, interruptions or breaches of our information systems, failure to meet external commitments and goals, including financial, and the activities of our clients, customers and counterparties, including vendors. In addition, negative information posted about Key on social media websites, whether or not factually correct, may affect our reputation and our business prospects. Actions by the financial services industry generally or by certain members or individuals in the industry may have a significant adverse effect on our reputation. We could also suffer significant reputational harm if we fail to properly identify and manage potential conflicts of interest. Management of potential conflicts of interests is complex as we expand our business activities through more numerous transactions, obligations, and interests with and among our clients. The actual or perceived failure to adequately address conflicts of interest could affect the willingness of clients to deal with us, which could adversely affect our businesses.

VII.  Strategic Risk

We may not realize the expected benefits of our strategic initiatives.

Our ability to compete depends on a number of factors, including, among others, our ability to develop and successfully execute our strategic plans and initiatives. Our strategic priorities include growing profitably and maintaining financial strength; effectively managing risk and reward; engaging a high-performing, talented, and diverse workforce; investing in digitalization to drive growth and simplification; embracing the changes required by our clients and the marketplace; and acquiring, expanding, and retaining targeted client relationships. The success of these initiatives can be subject to changes in the macroeconomic environment which is beyond our control. In addition, our inability to execute on or achieve the anticipated outcomes of our strategic priorities, or to do so in the expected timeframe, may affect how the market perceives us and could impede our growth and profitability.

We operate in a highly competitive industry.

We face substantial competition in all areas of our operations from a variety of competitors, some of which are larger and may have more financial resources than us. Our competitors primarily include national and super-regional banks as well as smaller community banks within the various geographic regions in which we operate. We also face competition from many other types of financial institutions, including, without limitation, savings associations, credit unions, mortgage banking companies, finance companies, mutual funds, insurance companies, investment management firms, investment banking firms, broker-dealers and other local, regional, national, and global financial services firms. In addition, technology has lowered barriers to entry and made it possible for nonbanks, including large technology companies, to offer products and services traditionally provided by banks. We expect the competitive landscape of the financial services industry to become even more intense as a result of legislative, regulatory, structural, customer preference, and technological changes.

Our ability to compete successfully depends on a number of factors, including: our ability to develop and execute strategic plans and initiatives; our ability to develop, maintain, and build long-term customer relationships based on
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quality service and competitive prices; our ability to develop competitive products and technologies demanded by our customers, while maintaining our high ethical standards and an effective compliance program and keeping our assets safe and sound; our ability to attract, retain, and develop a highly competent employee workforce; and industry and general economic trends. Increased competition in the financial services industry, or our failure to perform in any of these areas, could significantly weaken our competitive position, which could adversely affect our growth and profitability.

Maintaining or increasing our market share depends upon our ability to adapt our products and services to evolving industry standards and consumer preferences, while maintaining competitive prices.

The continuous, widespread adoption of new technologies, including internet services and mobile devices (such as smartphones and tablets), requires us to evaluate our product and service offerings to ensure they remain competitive. Our success depends, in part, on our ability to adapt our products and services, as well as our distribution of them, to evolving industry standards and consumer preferences. New technologies have altered consumer behavior by allowing consumers to complete transactions such as paying bills or transferring funds directly without the assistance of banks. New products allow consumers to maintain funds in brokerage accounts or mutual funds that would have historically been held as bank deposits. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer loans and deposits and related income generated from those products.

The increasing pressure from our competitors, both bank and nonbank, to keep pace and adopt new technologies and products and services requires us to incur substantial expense. We may be unsuccessful in developing or introducing new products and services, modifying our existing products and services, adapting to changing consumer preferences and spending and saving habits, achieving market acceptance or regulatory approval, sufficiently developing or maintaining a loyal customer base, or offering products and services at prices equal to or lower than the prices offered by our competitors. These risks may affect our ability to achieve growth in our market share and could reduce both our revenue streams from certain products and services and our revenues from our net interest income.

We may not be able to attract and retain skilled people.

Our success depends, in large part, on our ability to attract, retain, motivate, and develop a talented and diverse workforce. Competition for the best people in most of our business activities is ongoing and can be intense, and we may not be able to retain or hire the people we want or need to serve our customers. Additionally, the profile of some of the people we target has changed significantly, causing those with whom we compete for talent to also change and to include nonbanks and large technology companies. To attract and retain qualified employees, we must compensate these employees at market levels. Typically, those levels have caused employee compensation to be our greatest expense.

Our incentive compensation structure and sales practices are subject to review by our regulators, who may identify deficiencies in the structure of or issue additional guidance on our compensation practices, causing us to make changes that may affect our ability to offer competitive compensation to these individuals or that place us at a disadvantage to non-financial service competitors. Our ability to attract and retain talented employees may be affected by these developments or any new executive compensation limits and regulations.

Acquisitions or strategic partnerships may disrupt our business and dilute shareholder value.

Acquiring other banks, bank branches, or other businesses involves various risks commonly associated with acquisitions or partnerships, including exposure to unknown or contingent liabilities of the acquired company; diversion of our management’s time and attention; significant integration risk with respect to employees, accounting systems, and technology platforms; increased regulatory scrutiny; and, the possible loss of key employees and customers of the acquired company. We regularly evaluate merger and acquisition and strategic partnership opportunities and conduct due diligence activities related to possible transactions. As a result, mergers or acquisitions involving cash, debt or equity securities may occur at any time. Acquisitions may involve the payment of a premium over book and market values. Therefore, some dilution of our tangible book value and net income per common share could occur in connection with any future transaction.
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VIII.  Model Risk

We rely on quantitative models to manage certain accounting, risk management, capital planning, and treasury functions.

We use quantitative models to help manage certain aspects of our business and to assist with certain business decisions, including, but not limited to, estimating Current Expected Credit Losses, measuring the fair value of financial instruments when reliable market prices are unavailable, estimating the effects of changing interest rates and other market measures on our financial condition and results of operations, managing risk, and for capital planning purposes (including during the capital stress testing process). Because models are representations of reality, our modeling methodologies rely on many assumptions, historical analyses, correlations, and available data. These assumptions provide only reasonable, not absolute estimates, particularly in times of market distress when historical correlations on which we rely may no longer be relevant. Additionally, as businesses and markets evolve, our measurements may not accurately reflect this evolution. Models can also produce inadequate estimates due to errors in computer code, use of bad data during development or input into the model during model use, or the use of a model for a purpose outside the scope of the model’s design.

If our models fail to produce reliable results on an ongoing basis, we may not make appropriate risk management, capital planning, or other business or financial decisions. Furthermore, strategies that we employ to manage and govern the risks associated with our use of models may not be effective or fully reliable, and as a result, we may realize losses or other lapses.

We have an enterprise-wide model risk management program designed to accurately identify, measure, report, monitor, and manage model risk. The management of model risk includes independent validation and model governance, establishing and monitoring model control standards and model risk metrics, and completeness and accuracy of the inventory of models .

Banking regulators continue to focus on the models used by banks and bank holding companies in their businesses. The failure or inadequacy of a model may result in increased regulatory scrutiny on us or may result in an enforcement action or proceeding against us by one of our regulators.
ITEM 1B.  UNRESOLVED STAFF COMMENTS
None.
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ITEM 2.  PROPERTIES
The headquarters of KeyCorp and KeyBank are located at 127 Public Square, Cleveland, Ohio 44114-1306 in the Key Center. At December 31, 2020, Key leased approximately 445,324 square feet of the complex, encompassing the first floor branch, the 2nd through 9th office floors, the 11th and 12th floors, and the 54th through 56th floors of the 57-story Key Center. In addition, Key owned two buildings in Brooklyn, Ohio, with office space that it operated from and totaling 585,616 square feet at December 31, 2020. Our office space is used by all of our segments. As of the same date, KeyBank owned 457 branches and leased 616 branches. The lease terms for applicable branches are not individually material, with terms ranging from month-to-month to 99 years from inception.
ITEM 3.  LEGAL PROCEEDINGS
The information presented in the Legal Proceedings section of Note 22 (“Commitments, Contingent Liabilities, and Guarantees”) of the Notes to Consolidated Financial Statements is incorporated herein by reference.
On at least a quarterly basis, we assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that we will incur a loss and the amount of the loss can be reasonably estimated, we record a liability in our consolidated financial statements. These legal reserves may be increased or decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or the amount of the loss is not estimable, we have not accrued legal reserves, consistent with applicable accounting guidance. Based on information currently available to us, advice of counsel, and available insurance coverage, we believe that our established reserves are adequate and the liabilities arising from the legal proceedings will not have a material adverse effect on our consolidated financial condition. We note, however, that in light of the inherent uncertainty in legal proceedings there can be no assurance that the ultimate resolution will not exceed established reserves. As a result, the outcome of a particular matter or a combination of matters may be material to our results of operations for a particular period, depending upon the size of the loss or our income for that particular period.
ITEM 4.  MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.  MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The following disclosures included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to Consolidated Financial Statements contained in Item 8 of this report, are incorporated herein by reference:
Page(s)
Discussion of our common shares, shareholder information, and repurchase activities in the section captioned “Capital — Common Shares outstanding” 68
Discussion of dividends in the section captioned “Capital — Dividends” 68
The following graph compares the price performance of our Common Shares (based on an initial investment of $100 on December 31, 2015, and assuming reinvestment of dividends) with that of the S&P 500 Index and a group of other banks that constitute our peer group. The peer group consists of the banks that make up the S&P 500 Regional Bank Index and the banks that make up the Standard & Poor’s 500 Diversified Bank Index. We are included in the S&P 500 Index and the peer group.
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key-20201231_g2.jpg
(a) Share price performance is not necessarily indicative of future price performance.

From time to time, KeyCorp or its principal subsidiary, KeyBank, may seek to retire, repurchase, or exchange outstanding debt of KeyCorp or KeyBank, and capital securities or preferred stock of KeyCorp, through cash purchase, privately negotiated transactions, or otherwise. Such transactions, if any, depend on prevailing market conditions, our liquidity and capital requirements, contractual restrictions, and other factors. The amounts involved may be material.

In January 2021, the Board of Directors authorized the repurchase of up to $900 million of our common shares, effective through the third quarter of 2021. Under our previous authorization pursuant to our 2019 capital plan, we completed $152 million of Common Share repurchases in the first quarter of 2020, including $117 million of Common Share repurchases in the open market and $35 million of Common Share repurchases related to employee equity compensation programs. These repurchases were completed prior to our announcement to temporarily suspend share repurchase activity on March 17, 2020 in response to the COVID-19 pandemic. We repurchased a total of $489 million of common shares pursuant to the 2019 capital plan, dating back to the third quarter of 2019.

The following table summarizes our repurchases of our Common Shares for the three months ended December 31, 2020.
Calendar month
Total number of shares
repurchased (a)
Average price paid
per share
Total number of shares  purchased as part of publicly announced plans or programs
Maximum number of shares that may yet be purchased as part of publicly announced plans or programs (b)
October 1 - 31 3,704 13.07 3,704 27,611,169
November 1 - 30 1,546 $ 13.23 1,546 23,180,629
December 1 - 31 1,086,634 15.97 1,086,634 20,781,479
Total 1,091,884 $ 15.95 1,091,884
(a) Includes Common Shares repurchased in the open market and those deemed surrendered by employees in connection with our stock compensation and benefit plans to satisfy tax obligations.
(b) Calculated using the remaining general repurchase amount divided by the closing price of KeyCorp Common Shares as follows: on October 30, 2020, at $12.98; on November 30, 2020, at $15.46; and on December 31, 2020, at $16.41.
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ITEM 6.  SELECTED FINANCIAL DATA
dollars in millions, except per share amounts 2020 2019 2018 2017 2016 Compound
Annual
Rate
of Change
(2016-2020)
YEAR ENDED DECEMBER 31,
Interest income $ 4,685 5,235 4,878 4,390 3,319 7.1 %
Interest expense 651 1,326 969 613 400 10.2
Net interest income 4,034 3,909 3,909 3,777 2,919 6.7
Provision for credit losses 1,021 445 246 229 266 30.9
Noninterest income 2,652 2,459 2,515 2,478 2,071 5.1
Noninterest expense 4,109 3,901 3,975 4,098 3,756 1.8
Income (loss) from continuing operations before income taxes 1,556 2,022 2,203 1,928 968 10.0
Income (loss) from continuing operations attributable to Key 1,329 1,708 1,859 1,289 790 11.0
Income (loss) from discontinued operations, net of taxes 14 9 7 7 1 N/A
Net income (loss) attributable to Key 1,343 1,717 1,866 1,296 791 11.2
Income (loss) from continuing operations attributable to Key common shareholders 1,223 1,611 1,793 1,219 753 10.2
Income (loss) from discontinued operations, net of taxes 14 9 7 7 1 N/A
Net income (loss) attributable to Key common shareholders 1,237 1,620 1,800 1,226 754 10.4
PER COMMON SHARE
Income (loss) from continuing operations attributable to Key common shareholders $ 1.26 1.62 1.72 1.13 0.81 9.2
Income (loss) from discontinued operations, net of taxes .01 0.01 0.01 0.01 0 N/A
Net income (loss) attributable to Key common shareholders (a)
1.28 1.63 1.73 1.14 0.81 9.6
Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution
1.26 1.61 1.7 1.12 0.80 9.5
Income (loss) from discontinued operations, net of taxes — assuming dilution .01 0.01 0.01 0.01 0 N/A
Net income (loss) attributable to Key common shareholders — assuming dilution (a)
1.27 1.62 1.71 1.13 0.80 9.7
Cash dividends paid .74 0.71 0.565 0.38 0.33 17.5
Book value at year end 16.53 15.54 13.9 13.09 12.58 5.6
Tangible book value at year end 13.61 12.56 11.14 10.35 9.99 6.4
Market price at year end 16.41 20.24 14.78 20.17 18.27 (2.1)
Dividend payout ratio 57.8 % 43.6 % 32.7 % 33.3 % 40.7 % N/A
Weighted-average common shares outstanding (000) 967,783 992,091 1,040,890 1,072,078 927,816 301.5
Weighted-average common shares and potential common shares outstanding (000) (b)
974,807 1,002,254 1,054,682 1,088,593 938,536 301.1
AT DECEMBER 31,
Loans $ 101,185 94,646 89,552 86,405 86,038 3.3 %
Earning assets 155,469 130,807 125,803 123,490 121,966 5.0
Total assets 170,336 144,988 139,613 137,698 136,453 4.5
Deposits 135,282 111,870 107,309 105,235 104,087 5.4
Long-term debt 13,709 12,448 13,732 14,333 12,384 2.1
Key common shareholders’ equity 16,081 15,138 14,145 13,998 13,575 3.4
Key shareholders’ equity 17,981 17,038 15,595 15,023 15,240 3.4
PERFORMANCE RATIOS — FROM CONTINUING OPERATIONS
Return on average total assets .82 % 1.19 % 1.36 % 0.96 % 0.70 % N/A
Return on average common equity 7.77 10.83 12.88 8.65 6.26 N/A
Return on average tangible common equity (c)
9.51 13.46 16.22 10.84 7.39 N/A
Net interest margin (TE) 2.77 3.04 3.17 3.17 2.92 N/A
Cash efficiency ratio (c)
60.2 59.6 60.0 63.5 73.7 N/A
PERFORMANCE RATIOS — FROM CONSOLIDATED OPERATIONS
Return on average total assets .82 % 1.19 % 1.35 % 0.96 % 0.69 % N/A
Return on average common equity 7.86 10.89 12.93 8.7 6.27 N/A
Return on average tangible common equity (c)
9.62 13.53 16.28 10.9 7.4 N/A
Net interest margin (TE) 2.76 3.03 3.15 3.15 2.91 N/A
Loan to deposit (d)
76.5 86.6 85.6 84.4 85.2 N/A
CAPITAL RATIOS AT DECEMBER 31,
Key shareholders’ equity to assets 10.56 % 11.75 % 11.17 % 10.91 % 11.17 % N/A
Key common shareholders’ equity to assets 9.47 10.47 10.15 10.17 9.95 N/A
Tangible common equity to tangible assets (c)
7.93 8.64 8.3 8.23 8.09 N/A
Common Equity Tier 1 9.73 9.44 9.93 10.16 9.54 N/A
Tier 1 risk-based capital 11.11 10.86 11.08 11.01 10.89 N/A
Total risk-based capital 13.40 12.79 12.89 12.92 12.85 N/A
Leverage 8.94 9.88 9.89 9.73 9.9 N/A
TRUST ASSETS
Assets under management $ 44,140 40,833 36,775 39,588 36,592 1,545.5 %
OTHER DATA
Average full-time-equivalent employees 16,826 17,045 18,180 18,415 15,700 1.4 %
Branches 1,073 1,098 1,159 1,197 1,217 (2.5)
(a) EPS may not foot due to rounding.
(b) Assumes conversion of Common Share options and other stock awards and/or convertible preferred stock, as applicable.
(c) See the section entitled “GAAP to Non-GAAP Reconciliations,” which presents the computations of certain financial measures related to “tangible common equity” and “cash efficiency.” The section includes tables that reconcile the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons.
(d) Represents period-end consolidated total loans and loans held for sale divided by period-end consolidated total deposits (excluding deposits in foreign office).
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Page Number


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Introduction
This section reviews the financial condition and results of operations of KeyCorp and its subsidiaries for 2020 and 2019. Some tables include additional periods to comply with disclosure requirements or to illustrate trends in greater depth. When you read this discussion, you should also refer to the consolidated financial statements and related notes in this report. The page locations of specific sections that we refer to are presented in the table of contents. To review our financial condition and results of operations for 2018 and a comparison between the 2018 and 2019 results, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2019 Form 10-K filed with the SEC on February 26, 2020.
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Long-term financial targets
key-20201231_g3.jpg
(a) See the section entitled “GAAP to non-GAAP Reconciliations,” which presents the computations of certain financial measures related to “cash efficiency.” The section includes tables that reconcile the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons.



key-20201231_g4.jpg


key-20201231_g5.jpg
(a) See the section entitled “GAAP to non-GAAP Reconciliations,” which presents the computations of certain financial measures related to “tangible common equity.” The section includes tables that reconcile the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons.





Positive Operating Leverage

Generate positive operating leverage and a cash e fficiency ratio in the range of 54.0% to 56.0% .

Building on our performance in 2020, we expect to deliver positive operating leverage again in 2021. While remaining consistent over the past three years, we expect to make continued progress on our cash efficiency ratio during 2021 as we focus on expenses and strategically invest back into our business.










Moderate Risk Profile

Maintain a moderate risk profile by targeting a net loan charge-offs to average loans ratio in the range of .40% to .60% throug h a credit cycle.

Overall, credit quality remains strong as we continue to remain consistent and disciplined in our credit underwriting and portfolio management and are committed to maintaining our moderate risk profile. During 2020, our net loan charge-offs to average loans ratio was impacted b y $443 million of net loan charge-offs. Consistent with long-term targets, net charge-offs to average loans are expected to be in the 50 to 60 basis points range in 2021 based on full year guidance, which is in line with our through-the-cycle range of 40 to 60 basis points.


Financial Return

A retur n on average tangible common equity in the range of 16.0% to 19.0%.

Our full-year dividend for 2020 was $.74, a 4% increase from the previous year. In 2021, we remain committed to consistently delivering on our stated priorities of supporting organic growth, increasing dividends, and prudently repurchasing Common Shares.

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Corporate strategy

We remain committed to enhancing long-term shareholder value by continuing to execute our relationship-based business model, growing our franchise, and being disciplined in our capital management. Our strategic focus is to deliver ease, value, and expertise to help our clients make better financial decisions and build enduring relationships. We intend to pursue this strategy by growing profitably; acquiring and expanding targeted client relationships; effectively managing risk and rewards; maintaining financial strength; and engaging, retaining, and inspiring our diverse and high-performing workforce. These strategic priorities for enhancing long-term shareholder value are described in more detail below.

• Grow profitably — We intend to continue to focus on generating positive operating leverage by growing revenue and creating a more efficient operating environment. We expect our relationship business model to keep generating organic growth as it helps us expand engagement with existing clients and attract new customers. We plan to leverage our continuous improvement culture to maintain an efficient cost structure that is aligned, sustainable, and consistent with the current operating environment and that supports our relationship business model.
• Acquire and expand targeted client relationships — We seek to be client-centric in our actions and have taken purposeful steps to enhance our ability to acquire and expand targeted relationships. We seek to provide solutions to serve our clients' needs. We focus on markets and clients where we can be the most relevant. In aligning our businesses and investments against these targeted client segments, we are able to make a meaningful impact for our clients.
• Effectively manage risk and rewards — Our risk management activities are focused on ensuring we properly identify, measure, and manage risks across the entire company to maintain safety and soundness and maximize profitability.
• Maintain financial strength — With the foundation of a strong balance sheet, we intend to remain focused on sustaining strong reserves, liquidity and capital. We plan to work closely with our Board and regulators to manage capital to support our clients’ needs and drive long-term shareholder value. Our capital remains a competitive advantage for us.
• Engage a high-performing, talented, and diverse workforce — Every day our employees provide our clients with great ideas, extraordinary service, and smart solutions. We intend to continue to engage our high-performing, talented, and diverse workforce to create an environment where they can make a difference, own their careers, be respected, and feel a sense of pride.

Strategic developments

We took the following actions during 2020 in support of our corporate strategy:

• We continued to grow profitably during 2020. Our cash efficiency ratio remained consistent year over year, and we achieved our seventh consecutive year of positive operating leverage. Full year expenses were up 5.3% from t he prior year as a result of elevated production-related incentives, higher salaries due to merit increases, payments-related expenses from prepaid card activity, as well as COVID-19-related costs for steps that Key has taken to ensure the health and safety of teammates. R evenue was up for the year, driven by all-time high investment banking and debt placement fees, record consumer mortgage fees and higher prepaid card activity from state government support programs. We continued to see strong balance sheet growth as average loans were up 12.2% and average deposits were up 15.7% compared to the prior year. Our relationship-based business model continues to position us well with our targeted clients, which results in new and expanded relationships.
• Our residential mortgage business is another area where we are seeing strong returns on our investments. Residential mortgage loan originations for 2020 were $8.3 billion, up over 90% from 2019, with $2.5 billion originated in the fourth quarter of 2020. These two investments highlight our commitment to acquire and expand targeted client relationships .
• Overall, credit quality remains strong as our new loan originations in both our commercial and consumer book continue to meet our criteria for high quality loans as we continue to effectively manage risk and rewards.
• Maintaining financial strength while driving long-term shareholder value was again a focus during 2020. At December 31, 2020, our Common Equity Tier 1 and Tier 1 risk-based capital ratios stood at 9.73% and 11.11%, respectively. We repurchased $170 million of Common Shares, including $134 million of Common Shares in the open market and $36 million of Common Shares related to employee equity compensation programs. Our full-year dividend for 2020 was $.74, a 4% increase from the previous year.
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• We remained committed to our strategy to engage a high-performing, talented, and diverse workforce. W e have been recognized by multiple organizations for our dedication to creating an environment where employees are treated with respect and empowered to bring their authentic selves to work. Some of these awards and recognitions included the Human Rights Campaign naming us one of the Best Places to Work for LGBT Equality, Bloomberg listing us on the Gender-Equality Index, G.I. Jobs and Military Spouse Magazine recognizing us as a Military Friendly ® and Military Friendly ® Spouse Employer, and receiving the Leading Disability Employer Seal from the National Organization on Disability. We were also named to DiversityInc’s 2019 Top 50 Companies for Diversity.

Chief Diversity, Equity and Inclusion Officer Named

On April 13, 2020, we announced that Greg Jones has been named Chief Diversity, Equity, and Inclusion Officer for the company. In this role, Greg is accountable for leading the strategy and tactics to improve the acquisition, movement, development and retention of diverse talent and suppliers.

Results of Operations

Earnings Overview

The following chart provides a reconciliation of net income from continuing operations attributable to Key common shareholders for the year ended December 31, 2019, to the year ended December 31, 2020 (dollars in millions):
key-20201231_g6.jpg
(a) Includes Net income (loss) attributable to noncontrolling interest and Preferred dividends.
Net interest income
One of our principal sources of revenue is net interest income. Net interest income is the difference between interest income received on earning assets (such as loans and securities) and loan-related fee income, and interest expense paid on deposits and borrowings. There are several factors that affect net interest income, including:

• the volume, pricing, mix, and maturity of earning assets and interest-bearing liabilities;
• the volume and value of net free funds, such as noninterest-bearing deposits and equity capital;
• the use of derivative instruments to manage interest rate risk;
• interest rate fluctuations and competitive conditions within the marketplace;
• asset quality; and
• fair value accounting of acquired earning assets and interest-bearing liabilities.

To make it easier to compare both the results among several periods and the yields on various types of earning assets (some taxable, some not), we present net interest income in this discussion on a “TE basis” (i.e., as if all
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income were taxable and at the same rate). For example, $100 of tax-exempt income would be presented as $126, an amount that, if taxed at the statutory federal income tax rate of 21%, would yield $100. Prior to 2018, $100 of tax-exempt income would be presented as $154, an amount that, if taxed at the previous statutory federal income tax rate of 35%, would yield $100.

Figure 1 shows the various components of our balance sheet that affect interest income and expense, and their respective yields or rates over the past five years. This figure also presents a reconciliation of TE net interest income to net interest income reported in accordance with GAAP for each of those years. The net interest margin, which is an indicator of the profitability of our earning assets less the cost of funding, is calculated by dividing taxable-equivalent net interest income by average earning assets.
key-20201231_g7.jpg
TE net interest income for 2020 was $4.1 billion, and the net interest margin was 2.77%, compared to TE net interest income of $3.9 billion and a net interest margin of 3.04% for the prior year. Net interest income for 2020 reflects an increase in earning asset balances and higher loan fees, partially offset by a lower net interest margin. The net interest margin was impacted by lower interest rates, Key’s participation in the PPP, and elevated levels of liquidity. In 2021, we expect TE net interest income to be relatively stable compared to 2020 and the net interest margin to be relatively stable compared to the fourth quarter of 2020.
key-20201231_g8.jpg key-20201231_g9.jpg
Average loans totaled $102.7 billion for 2020, compared to $91.5 billion in 2019. Commercial loans increased $7.7 billion, reflecting Key’s participation in the PPP as well as core broad based growth in commercial and industrial loans. Consumer loans increased $3.5 billion, driven by strength from Laurel Road and Key's consumer mortgage business. For 2021, we expect average loans to be relatively stable compared to 2020.

Average deposits totaled $127.3 billion for 2020, an increase of $17.3 billion compared to 2019, reflecting growth from consumer and commercial relationships, partially offset by a decline in time deposits as a result of lower interest rates. For 2021, we expect average deposits to be up 1% to 3% compared to 2020.

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Figure 1. Consolidated Average Balance Sheets, Net Interest Income, and Yields/Rates from Continuing Operations
Year ended December 31, 2020 2019
dollars in millions
Average
Balance
Interest (a)
Yield/
Rate (a)
Average
Balance
Interest (a)
Yield/
Rate (a)
ASSETS
Loans (b), (c)
Commercial and industrial (d)
$ 55,145 $ 1,977 3.59 % $ 47,482 $ 2,144 4.51 %
Real estate — commercial mortgage 13,279 521 3.92 13,641 676 4.95
Real estate — construction 1,843 74 3.99 1,485 78 5.24
Commercial lease financing 4,497 139 3.09 4,488 163 3.63
Total commercial loans 74,764 2,711 3.63 67,096 3,061 4.56
Real estate — residential mortgage 8,094 284 3.50 6,095 241 3.95
Home equity loans 9,772 392 4.01 10,634 526 4.95
Consumer direct loans 4,213 221 5.26 2,475 176 7.11
Credit cards 1,001 107 10.65 1,100 127 11.51
Consumer indirect loans 4,845 180 3.72 4,111 168 4.09
Total consumer loans 27,925 1,184 4.24 24,415 1,238 5.07
Total loans 102,689 3,895 3.79 91,511 4,299 4.70
Loans held for sale 1,972 69 3.49 1,411 63 4.48
Securities available for sale (b), (e)
23,742 484 2.10 21,362 537 2.51
Held-to-maturity securities (b)
8,938 222 2.49 10,841 262 2.41
Trading account assets 814 20 2.47 1,017 32 3.18
Short-term investments 9,096 18 .20 2,876 61 2.11
Other investments (e)
635 6 .87 630 13 2.09
Total earning assets 147,886 4,714 3.20 129,648 5,267 4.06
Allowance for loan and lease losses (1,481) (880)
Accrued income and other assets 15,650 14,411
Discontinued assets 775 984
Total assets $ 162,830 $ 144,163
LIABILITIES
NOW and money market deposit accounts $ 75,733 206 .27 $ 63,731 566 .89
Savings deposits 5,252 2 .04 4,740 4 .09
Certificates of deposit ($100,000 or more) (f)
4,520 83 1.83 7,757 180 2.32
Other time deposits 4,041 56 1.38 5,426 103 1.90
Deposits in foreign office — — — — — —
Total interest-bearing deposits 89,546 347 .39 81,654 853 1.04
Federal funds purchased and securities sold under repurchase agreements 670 6 .88 264 2 .66
Bank notes and other short-term borrowings 1,452 12 .85 730 17 2.31
Long-term debt (f), (g)
12,578 286 2.36 13,062 454 3.52
Total interest-bearing liabilities 104,246 651 .63 95,710 1,326 1.39
Noninterest-bearing deposits 37,740 28,376
Accrued expense and other liabilities 2,433 2,456
Discontinued liabilities (g)
775 984
Total liabilities 145,194 127,526
EQUITY
Key shareholders’ equity 17,636 16,636
Noncontrolling interests — 1
Total equity 17,636 16,637
Total liabilities and equity $ 162,830 $ 144,163
Interest rate spread (TE) 2.57 % 2.67 %
Net interest income (TE) and net interest margin (TE) 4,063 2.77 % 3,941 3.04 %
Less: TE adjustment (b)
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Net interest income, GAAP basis $ 4,034 $ 3,909
(a) Results are from continuing operations. Interest excludes the interest associated with the liabilities referred to in (g) below, calculated using a matched funds transfer pricing methodology.
(b) Interest income on tax-exempt securities and loans has been adjusted to a TE basis using the statutory federal income tax rate in effect that calendar year.
(c) For purposes of these computations, nonaccrual loans are included in average loan balances.
(d) Commercial and industrial average loan balances include $130 million, $141 million, $126 million, $117 million, and $99 million of assets from commercial credit cards for the years ended December 31, 2020, December 31, 2019, December 31, 2018, December 31, 2017, and December 31, 2016, respectively.
(e) Yield is calculated on the basis of amortized cost.
(f) Rate calculation excludes basis adjustments related to fair value hedges.
(g) A portion of long-term debt and the related interest expense is allocated to discontinued liabilities as a result of applying our matched funds transfer pricing methodology to discontinued operations.
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Figure 1. Consolidated Average Balance Sheets, Net Interest Income, and Yields/Rates from Continuing Operations (Continued)
2018 2017 2016 Compound Annual Rate of
Change (2016-2020)
Average
Balance
Interest (a)
Yield/
Rate (a)
Average
Balance
Interest (a)
Yield/
Rate (a)
Average
Balance
Interest (a)
Yield/
Rate (a)
Average
Balance 		Interest
$ 44,418 $ 1,926 4.34 % $ 40,848 $ 1,613 3.95 % $ 35,276 $ 1,215 3.45 % 9.3 % 10.2 %
14,267 698 4.90 14,878 687 4.62 11,063 451 4.07 3.7 2.9
1,816 90 4.97 2,143 103 4.78 1,460 76 5.22 4.8 (.5)
4,534 168 3.70 4,677 185 3.96 4,261 161 3.78 1.1 (2.9)
65,035 2,882 4.43 62,546 2,588 4.14 52,060 1,903 3.66 7.5 7.3
5,473 217 3.97 5,499 214 3.89 3,632 148 4.09 17.4 13.9
11,530 547 4.74 12,380 536 4.33 11,286 456 4.04 (2.8) (3.0)
1,782 137 7.66 1,765 126 7.12 1,661 113 6.79 20.5 14.4
1,092 125 11.40 1,055 118 11.15 916 98 10.73 1.8 1.8
3,426 146 4.27 3,120 148 4.75 1,593 89 5.58 24.9 15.1
23,303 1,172 5.03 23,819 1,142 4.79 19,088 904 4.74 7.9 5.5
88,338 4,054 4.59 86,365 3,730 4.32 71,148 2,807 3.95 7.6 6.8
1,501 66 4.43 1,325 52 3.96 979 34 3.51 15.0 15.2
17,898 409 2.20 18,548 369 1.96 16,661 329 1.98 7.3 8.0
12,003 284 2.37 10,515 222 2.11 6,275 122 1.94 7.3 12.7
893 29 3.25 949 27 2.81 884 23 2.59 (1.6) (2.8)
2,450 46 1.86 2,363 26 1.11 4,656 22 .47 14.3 (3.9)
697 21 3.04 712 17 2.35 679 16 2.37 (1.3) (17.8)
123,780 4,909 3.94 120,777 4,443 3.67 101,282 3,353 3.31 7.9 7.1
(878) (865) (835) 12.1
13,910 13,807 12,090 5.3
1,212 1,448 1,707 (14.6)
$ 138,024 $ 135,167 $ 114,244 7.3 %
$ 56,001 297 .53 $ 54,032 143 .26 $ 46,079 87 .19 10.4 % 18.8
5,704 14 .24 6,569 13 .20 3,957 3 .07 5.8 (7.8)
7,728 139 1.80 6,233 82 1.31 3,911 48 1.22 2.9 11.6
5,025 67 1.34 4,698 40 .85 4,088 33 .81 (.2) 11.2
— — — — — — — — — N/M N/M
74,458 517 .69 71,532 278 .39 58,035 171 .30 9.1 15.2
928 11 1.14 517 1 .24 487 1 .10 6.6 43.1
915 21 2.34 1,140 15 1.34 852 10 1.18 11.3 3.7
12,715 420 3.27 11,921 319 2.69 9,802 218 2.29 5.1 5.6
89,016 969 1.09 85,110 613 .72 69,176 400 .58 8.5 10.2
30,593 31,414 28,317 5.9
2,071 1,970 2,393 .3
1,212 1,448 1,706 (14.6)
122,892 119,942 101,592 7.4
15,131 15,224 12,647 6.9
1 1 5 (100.0)
15,132 15,225 12,652 6.9
$ 138,024 $ 135,167 $ 114,244 7.3 %
2.85 % 2.95 % 2.73 %
3,940 3.17 % 3,830 3.17 % 2,953 2.92 % 6.6
31 53 34 (3.1)
$ 3,909 $ 3,777 $ 2,919 6.7 %
(e) Yield is calculated on the basis of amortized cost.
(f) Rate calculation excludes basis adjustments related to fair value hedges.
(g) A portion of long-term debt and the related interest expense is allocated to discontinued liabilities as a result of applying our matched funds transfer pricing methodology to discontinued operations.
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Figure 2 shows how the changes in yields or rates and average balances from the prior year affected net interest income. The section entitled “Financial Condition” contains additional discussion about changes in earning assets and funding sources.
Figure 2. Components of Net Interest Income Changes from Continuing Operations
2020 vs. 2019
in millions
Average
Volume
Yield/ Rate
Net Change (a)
INTEREST INCOME
Loans $ 463 $ (867) $ (404)
Loans held for sale 22 (16) 6
Securities available for sale 56 (109) (53)
Held-to-maturity securities (47) 7 (40)
Trading account assets (6) (6) (12)
Short-term investments 48 (91) (43)
Other investments — (7) (7)
Total interest income (TE) 536 (1,089) (553)
INTEREST EXPENSE
NOW and money market deposit accounts 91 (451) (360)
Savings deposits — (2) (2)
Certificates of deposit ($100,000 or more) (65) (32) (97)
Other time deposits (23) (24) (47)
Total interest-bearing deposits 3 (509) (506)
Federal funds purchased and securities sold under repurchase agreements 4 — 4
Bank notes and other short-term borrowings 10 (15) (5)
Long-term debt (16) (152) (168)
Total interest expense 1 (676) (675)
Net interest income (TE) $ 535 $ (413) $ 122
(a) The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each.
Provision for credit losses
key-20201231_g10.jpg
Our provision for credit losses was $1.0 billion for 2020, compared to $445 million for 2019. The increase of $576 million in our provision for credit losses is primarily due to the economic stress and uncertainty in the U.S. and globally from the ongoing pandemic caused by COVID-19 as well as increased net loan charge-offs. In 2019 our provision for credit losses was impacted by the realization of $139 million from a previously disclosed fraud loss. In 2021 we expect loan charge-offs to average loans to be in the range of 50 to 60 bps.


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Noninterest income

Noninterest income for 2020 was $2.7 billion, compared to $2.5 billion during 2019. Noninterest income represented 39% of total revenue for 2020 and 38% of total revenue for 2019. In 2021, we expect noninterest income to be up 1% to 3% compared to 2020.

The following discussion explains the composition of certain elements of our noninterest income and the factors that caused those elements to change.

Figure 3. Noninterest Income
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(a) Other noninterest income includes operating lease income and other leasing gains, corporate services income, corporate-owned life insurance income, consumer mortgage income, mortgage servicing fees, and other income. See the "Consolidated Statements of Income" in Part II, Item 8. Financial Statements and Supplementary Data of this report.
key-20201231_g13.jpg key-20201231_g14.jpg key-20201231_g15.jpg key-20201231_g16.jpg

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Trust and investment services income
Trust and investment services income consists of brokerage commissions, trust and asset management commissions, and insurance income. For 2020, trust and investment services income increased $32 million, or 6.7% as a result of an increase in assets under management.
A significant portion of our trust and investment services income depends on the value and mix of assets under management. At December 31, 2020, our bank, trust, and registered investment advisory subsidiaries had assets under management of $44.1 billion, compared to $40.8 billion at December 31, 2019. The increase from 2019 to 2020 was primarily attributable to the strength of the equity markets during the year.

Figure 4. Assets Under Management
Year ended December 31, Change 2020 vs. 2019
dollars in millions 2020 2019 Amount Percent
Assets under management by investment type:
Equity $ 27,384 $ 25,271 $ 2,113 8.4 %
Securities lending 131 309 (178) (57.6)
Fixed income 12,130 11,000 1,130 10.3
Money market 4,495 4,253 242 5.7
Total $ 44,140 $ 40,833 $ 3,307 8.1 %

Investment banking and debt placement fees

Investment banking and debt placement fees consist of syndication fees, debt and equity financing fees, financial advisor fees, gains on sales of commercial mortgages, and agency origination fees. For 2020, investment banking and debt placement fees increased $31 million, or 4.9%, from the prior year driven by gains on the sale of commercial mortgages and strong debt and equity financing fees.

Service charges on deposit accounts

Service charges on deposit accounts decreased $26 million, or 7.7%, in 2020 compared to the prior year. These decreases were primarily due to lower customer spending and higher fee waivers related to the ongoing COVID-19 pandemic.

Cards and payments income

Cards and payments income, which consists of debit card, consumer and commercial credit card, and merchant services income, increased $93 million, or 33.8%, in 2020 compared to 2019. This increase was primarily due to higher prepaid card activity from state government support programs.

Other noninterest income

Other noninterest income includes operating lease income and other leasing gains, corporate services income, corporate-owned life insurance income, consumer mortgage income, mortgage servicing fees, and other income. Other noninterest income increased $63 million, or 8.5%, in 2020 compared to 2019, driven primarily by record mortgage origination income partially offset by trading losses and portfolio marks related to the widening credit spreads in the market.

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Noninterest expense
Noninterest expense for 2020 was $4.1 billion, compared to $3.9 billion for 2019. Figure 5 gives a breakdown of our major categories of noninterest expense as a percentage of total noninterest expense for the twelve months ended December 31, 2020. In 2021, we expect noninterest expense to be down 1% to 3% compared to 2020.

The following discussion explains the composition of certain elements of our noninterest expense and the factors that caused those elements to change.
Figure 5. Noninterest Expense
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(a) Other noninterest expense includes equipment, operating lease expense, marketing, FDIC assessment, intangible asset amortization, OREO expense, net, and other expense. See the "Consolidated Statements of Income" in Part II, Item 8. Financial Statements and Supplementary Data of this report.
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Personnel
As shown in Figure 6, personnel expense, the largest category of our noninterest expense, increased by $86 million, or 3.8%, in 2020 compared to 2019. The increase is driven by higher production-related incentives from our record fee production and higher salaries due to merit increases.
Figure 6. Personnel Expense
Year ended December 31,
dollars in millions
Change 2020 vs. 2019
2020 2019 Amount Percent
Salaries and contract labor $ 1,329 $ 1,268 $ 61 4.8 %
Incentive and stock-based compensation (a)
627 584 43 7.4
Employee benefits 350 348 2 .6
Severance 30 50 (20) (40.0)
Total personnel expense $ 2,336 $ 2,250 $ 86 3.8 %
(a) Excludes directors’ stock-based compensation of $2 million in 2020 and $3 million in 2019, reported as “other noninterest expense” in Figure 5.

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Net occupancy

Net occupancy expense increased $5 million, or 1.7%, in 2020 compared to 2019, primarily due to higher property reserve expenses and cleaning expenses related to the steps that we have taken to ensure the health and safety of teammates and customers during the ongoing COVID-19 pandemic.

Other noninterest expense

Other noninterest expense includes equipment, operating lease expense, marketing, FDIC assessment, intangible asset amortization, OREO expenses, and other miscellaneous expense categories. In total, other noninterest expense increased $89 million, or 9.3%, in 2020 compared to 2019 primarily attributable to higher payments-related expenses from prepaid card activity.

Income taxes

We recorded a tax provision from continuing operations of $227 million for 2020, compared to $314 million for 2019. The effective tax rate, which is the provision for income taxes as a percentage of income from continuing operations before income taxes, was 14.6% for 2020 and 15.6% for 2019. In 2021, we expect our GAAP tax rate to be approximately 19%.

In 2020, our federal tax expense and effective tax rate differ from the amount that would be calculated using the federal statutory tax rate; primarily from investments in tax-advantaged assets, such as corporate-owned life insurance, tax credits associated with investments in low-income housing projects and energy related projects, and periodic adjustments to our tax reserves as described in Note 14 (“Income Taxes”).

Business Segments Results

We previously reported our results of operations through two business segments, Key Community Bank and Key Corporate Bank, with the remaining operations recorded in Other. In the first quarter of 2019, we underwent a company-wide organizational change, resulting in the realignment of our businesses into two reportable business segments, Consumer Bank and Commercial Bank, with the remaining operations that do not meet the criteria for disclosure as a separate reportable business recorded in Other. The new business segment structure aligns with how management reviews performance and makes decisions by client, segment, and business unit. Prior period information was restated to conform to the new business segment structure.

This section summarizes the highlights and segment imperatives, market and business overview, and financial performance of our two major business segments (operating segments): Consumer Bank and Commercial Bank. Note 25 (“Business Segment Reporting”) describes the products and services offered by each of these business segments and provides more detailed financial information pertaining to the segments. Dollars in the charts are presented in millions.
Consumer Bank

Segment imperatives

• Simplification and digitalization to drive growth and operating leverage
• Relationship-based strategy with a focus on financial wellness as a differentiator
• Deliver ease, value, and expertise to help guide our clients to the right approach to meet their goals

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Market and business overview

As the banking industry moves forward, so do our clients. Anticipating our clients’ needs not only today, but for tomorrow and into the future, has become one of the biggest challenges for the banking industry. We view these challenges as an opportunity to help our current client base meet their own goals, as well as attract new and diverse clients. In an increasingly digital world focused on specialized convenience, we have made meaningful steps to meet those demands through new digital portals and the acquisition of Laurel Road in 2019. These platforms place us in a strong position to develop long lasting and meaningful relationships with our current and prospective clients. Financial wellness is a core tenet of our customer relationships and we see it in three different ways: diagnose, enhance, and sustain. Our goal is to get our clients to a place where they can comfortably sustain their current financial position so we can be there for them when they are ready to grow. Clients no longer go to a branch to conduct transactions only, they go to seek advice and gain new perspectives on issues they may be facing. Overall, we have a passion to help our clients through:

• Ease - enabling simple and clear banking with no surprises
• Value - knowing our clients and valuing each relationship
• Expertise - provide our clients with industry-leading expertise and personalized service

Summary of operations

• Net income attributable to Key of $665 million in 2020, compared to $706 million in 2019, a decrease of 5.8%.
• Taxable equivalent net interest income increased in 2020 by $68 million, or 2.9%, from the prior year. The increase in net interest income was primarily driven by strong balance sheet growth and fees related to PPP loans, partially offset by a lower interest rate environment.
• Average loans and leases increased in 2020 by $6.4 billion, or 19.6%, from the prior year. This was driven by growth from Laurel Road and consumer mortgage.
• Average deposits increased in 2020 by $7.3 billion, or 10.0%, from the prior year. This was driven by consumer stimulus payments, lower spend activity, and relationship growth.
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• Provision for credit losses increased $100 million in 2020 compared to the prior year. The increase in provision for credit losses is driven by portfolio growth and CECL economic forecasts that capture deterioration triggered by the global COVID-19 pandemic.
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• Noninterest income increased in 2020 by $81 million, or 8.8%, from the prior year, primarily driven by growth in consumer mortgage income and originations, as well as increases in cards and payments income.
• Noninterest expense increased in 2020 by $102 million, or 4.7%, from the prior year. The increase is due to higher variable compensation from strong revenue growth and higher variable expenses related to higher loan volumes.
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Commercial Bank

Segment imperatives

• Solve complex client needs through a differentiated product set of banking and capital markets capabilities
• Drive targeted scale through distinct product capabilities delivered to a broad set of clients
• Utilize industry expertise and broad capabilities to build relationships with narrowly targeted client sets

Market and business overview

Building relationships and delivering complex solutions for middle market clients requires a distinctive operating model that understands their business and can provide a broad set of product capabilities. As competition for these clients intensifies, we have positioned the business to maintain and grow our competitive advantage by building targeted scale in businesses and client segments. Strong market share in businesses such as real estate loan servicing and equipment finance highlights our ability to successfully meet customer needs through targeted scale in distinct product capabilities. Clients expect us to understand every aspect of their business. Our seven industry verticals are aligned to drive targeted scale in segments where we have a deep breadth of industry expertise. Healthcare is the largest sector of the economy and one of our targeted verticals. Our acquisition of Cain Brothers in 2017 is one example of how we have expanded our business capabilities to further enhance our reputation as a trusted advisor to current and prospective clients. Our business model is positioned to meet our client needs because our focus is not on being a universal bank, but rather being the right bank for our clients.

Summary of operations

• Net income attributable to Key of $633 million in 2020, compared to $1.1 billion in 2019, a decrease of 44.0%.
• Taxable equivalent net interest income increased in 2020 by $77 million, or 4.8%, from the prior year. The increase in net interest income was primarily driven by balance sheet growth and fees related to PPP loans.
• Average loan and lease balances increased $5.1 billion in 2020, or 8.8%, compared to the prior year driven by broad-based growth in commercial, industrial, and PPP loans.
• Average deposit balances increased $10.7 billion in 2020, or 29.4%, compared to the prior year, driven by growth in targeted relationships and the impact of government programs.
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• Provision for credit losses increased $620 million in 2020 compared to the prior year, driven by CECL economic forecasts that capture deterioration triggered by the global COVID-19 pandemic and higher net charge-offs.
• Noninterest income increased $117 million in 2020, or 8.4%, from the prior year. The increase was mainly related to higher investment banking fees and cards and payments income, partially offset by decreases in corporate services income.
• Noninterest expense increased by $190 million in 2020, or 12.3%, from the prior year, driven by elevated variable expenses related to prepaid card and higher variable compensation from strong revenue growth.
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Financial Condition
Loans and loans held for sale
Figure 7. Breakdown of Loans
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(a) Other consumer loans include Consumer direct loans, Credit cards, and Consumer indirect loans. See Note 4 (“Loan Portfolio”) Item 8. Financial Statements of this report.

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COVID-19 Hardship Relief Programs

In response to the COVID-19 pandemic, beginning in March 2020, we began providing relief and flexibility to our customers through a variety of solutions, including fee waivers, short-term loan modifications, and payment deferrals as well as the suspension of vehicle repossessions and home foreclosures. While the solutions for our commercial borrowers are individually negotiated and tailored to each borrower’s specific facts and circumstances, the most commonly offered relief measures included temporary covenant waivers and/or deferrals of principal and/or interest payments for up to 90 days. We have also granted short-term loan modifications for our consumer loan customers through extensions, deferrals, and forbearance.

The following table provides a summary of portfolio loans and leases as of December 31, 2020, that have received a payment deferral or forbearance as part of our COVID-19 hardship relief programs:

Figure 8. Loans and Leases COVID-19 Hardship Relief
Outstanding Balance of Loans and Leases
December 31, 2020
dollars in millions Completed Relief In Active Relief Total that have Received Payment Relief
Commercial Loans $ 2,899 $ 181 $ 3,079
Consumer Loans 1,179 394 1,572
Total Portfolio Loans and Leases $ 4,077 $ 575 $ 4,652

The total outstanding balance of commercial loans in active relief as of December 31, 2020, represented 0.3% of our commercial loan portfolio and the total outstanding balance of consumer loans in active relief as of December 31, 2020, represented 1.3% of the consumer portfolio. As of December 31, 2020, the cumulative number of commercial loans that have received any form of hardship relief due to COVID-19 hardships totaled 251 loans and the cumulative number of consumer loans that have received any form of hardship relief due to COVID-19 hardships totaled 4,766 loans.

Under the CARES Act as well as banking regulator interagency guidance, certain loan modifications to borrowers experiencing financial distress as a result of the economic impacts created by COVID-19 may not be required to be treated as TDRs under U.S. GAAP.  For COVID-19 related loan modifications which occurred from March 1, 2020, through December 31, 2020, and met the loan modification criteria under either the CARES Act or the criteria specified by the regulatory agencies or were otherwise considered to be short term in nature, we have elected to suspend TDR accounting for such loan modifications.  Additionally, loans qualifying for these modifications are not required to be reported as delinquent, nonaccrual, impaired, or criticized solely as a result of a COVID-19 loan modification. Refer to Note 5 (“Asset Quality”) under the headings “TDRs” and “Nonperforming and Past Due Loans”.

For loans that receive a payment deferral or forbearance under these hardship relief programs, we continue to accrue interest and recognize interest income during the period of the deferral. Depending on the terms of each program, all or a portion of this accrued interest may be paid directly by the borrower (either during the relief period, at the end of the relief period, or at maturity of the loan) or added to the customer’s outstanding balance. For certain programs, the maturity date of the loan may also be extended by the number of payments deferred. Interest income will continue to be accrued at the original contractual interest rate unless that rate is concurrently modified upon entering the relief program (in which case, the modified rate would be used to recognize interest).
Commercial loan portfolio
Commercial loans outstanding were $72.0 billion at December 31, 2020, an increase of $3.9 billion, or 5.8%, compared to December 31, 2019, driven by the outstanding balance of $6.7 billion related to the PPP partly offset by a decline in commercial and industrial utilization rates.

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As a result of the current economic environment, our commercial loan portfolio is going through active portfolio surveillance. We are conducting ongoing portfolio reviews on our commercial loans with any risk rating migrations being closely monitored. We have centralized internal reporting on enterprise-wide relief initiatives, as well as following any potential relief initiatives that may come in the future. We have also established a pandemic watchlist and are performing ongoing reviews of commercial clients that are likely to be impacted by COVID-19. Overall, these clients represent a small portion of the overall portfolio and are diversified by type and geogr aphy. Figure 9 summarizes our commercial portfolios that are at risk of being impacted by the COVID-19 pandemic as of December 31, 2020.

Figure 9. Select Commercial Portfolio Focus Areas
dollars in millions Outstanding as of December 31, 2020 Percentage of total loans as of December 31, 2020
Consumer behavior (a)
$ 5,083 5.0 %
Education 1,541 1.5
Sports 690 .7
Restaurants 400 .4
Retail commercial real estate (b)
525 .5
Nondurable retail (c)
638 .6
Travel/Tourism (d)
2,523 2.5
Hotels 784 .8
Leveraged lending (e)
1,700 1.7
Oil and gas 1,992 2.0
Upstream (reserve based) 1,263 1.2
Midstream 468 .5
Downstream 98 .1
(a) Consumer behavior includes restaurants, sports, entertainment and leisure, services, education, etc.
(b) Retail commercial real estate is mainly composed of regional malls, strip centers (unanchored) and lifestyle centers.
(c) Nondurable retail includes direct lending to retailers including apparel, hobby shops, nursery garden centers, cosmetics, and gas stations with convenience stores.
(d) Travel/Tourism includes hotels, tours, and air/water/rail leasing.
(e) Leveraged lending exposures have total debt to EBITDA greater than four times or senior debt to EBITDA greater than three times and meet the purpose test (the new debt finances a buyout, acquisition, or capital distribution).

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Figure 10 shows the composition of our loan portfolio at December 31 for each of the past five years.
Figure 10. Composition of Loans
2020 2019 2018
December 31,
dollars in millions
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
COMMERCIAL
Commercial and industrial (a)
$ 52,907 52.3 % $ 48,295 51.0 % $ 45,753 51.1 %
Commercial real estate:
Commercial mortgage 12,687 12.5 13,491 14.3 14,285 15.9
Construction 1,987 2.0 1,558 1.6 1,666 1.9
Total commercial real estate loans 14,674 14.5 15,049 15.9 15,951 17.8
Commercial lease financing (b)
4,399 4.3 4,688 5.0 4,606 5.1
Total commercial loans 71,980 71.1 68,032 71.9 66,310 74.0
CONSUMER
Real estate — residential mortgage 9,298 9.2 7,023 7.4 5,513 6.2
Home equity loans 9,360 9.2 10,274 10.9 11,142 12.4
Consumer direct loans 4,714 4.7 3,513 3.7 1,809 2.0
Credit cards 989 1.0 1,130 1.2 1,144 1.3
Consumer indirect loans 4,844 4.8 4,674 4.9 3,634 4.1
Total consumer loans 29,205 28.9 26,614 28.1 23,242 26.0
Total loans (c)
$ 101,185 100.0 % $ 94,646 100.0 % $ 89,552 100.0 %
2017 2016
Amount
Percent
of Total
Amount
Percent
of Total
COMMERCIAL
Commercial and industrial (a)
$ 41,859 48.4 % $ 39,768 46.2 %
Commercial real estate:
Commercial mortgage 14,088 16.3 % 15,111 17.6 %
Construction 1,960 2.3 2,345 2.7
Total commercial real estate loans 16,048 18.6 17,456 20.3
Commercial lease financing (b)
4,826 5.6 4,685 5.5
Total commercial loans 62,733 72.6 61,909 72.0
CONSUMER
Real estate — residential mortgage 5,483 6.3 5,547 6.4
Home equity loans 12,028 13.9 12,674 14.7
Consumer direct loans 1,794 2.1 1,788 2.1
Credit cards 1,106 1.3 1,111 1.3
Consumer indirect loans 3,261 3.8 3,009 3.5
Total consumer loans 23,672 27.4 24,129 28.0
Total loans (c)
$ 86,405 100.0 % $ 86,038 100.0 %
(a) Loan balances include $127 million, $144 million, $132 million, $119 million, and $116 million, of commercial credit card balances at December 31, 2020, December 31, 2019, December 31, 2018, December 31, 2017, and December 31, 2016, respectively.
(b) Commercial lease financing includes receivables held as collateral for a secured borrowing of $19 million , $15 million, $10 million, $24 million, and $68 million at December 31, 2020, December 31, 2019, December 31, 2018, December 31, 2017, and December 31, 2016, respectively. Principal reductions are based on the cash payments received from these related receivables. Additional information pertaining to this secured borrowing is included in Note 20 (“Long-Term Debt”).
(c) Total loans exclude loans of $710 million at December 31, 2020, $865 million at December 31, 2019, $1.1 billion at December 31, 2018, $1.3 billion at December 31, 2017, and $1.6 billion at December 31, 2016, related to the discontinued operations of the education lending business.
At December 31, 2020, total loans outstanding from continuing operations were $101.2 billion, compared to $94.6 billion at the end of 2019. For more information on balance sheet carrying value, see Note 1 (“Summary of Significant Accounting Policies”) under the headings “Loans” and “Loans Held for Sale.”

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Figure 11 provides our commercial loan portfolio by industry classification as of December 31, 2020, and December 31, 2019.
Figure 11. Commercial Loans by Industry
December 31, 2020 Commercial and industrial Commercial
real estate 		Commercial
lease financing 		Total commercial
loans 		Percent of
total
dollars in millions
Industry classification:
Agriculture $ 1,002 $ 148 $ 97 $ 1,247 1.7 %
Automotive 1,863 510 19 2,392 3.3
Business products 1,523 117 45 1,685 2.3
Business services 4,098 221 202 4,521 6.3
Chemicals 700 30 34 764 1.1
Construction materials and contractors 2,571 271 233 3,075 4.3
Consumer discretionary 3,832 404 371 4,607 6.4
Consumer services 6,123 900 525 7,548 10.5
Equipment 1,447 84 120 1,651 2.3
Finance 6,190 92 396 6,678 9.3
Healthcare 4,348 1,396 306 6,050 8.4
Metals and mining 1,074 56 29 1,159 1.6
Oil and gas 1,928 43 62 2,033 2.8
Public exposure 2,332 25 709 3,066 4.3
Commercial real estate 5,966 10,187 11 16,164 22.5
Technology 741 20 191 952 1.2
Transportation 1,434 144 631 2,209 3.1
Utilities 5,239 1 397 5,637 7.8
Other 496 25 21 542 .8
Total $ 52,907 $ 14,674 $ 4,399 $ 71,980 100.0 %
December 31, 2019 Commercial and industrial Commercial
real estate 		Commercial
lease financing 		Total commercial
loans 		Percent of
total
dollars in millions
Industry classification:
Agriculture $ 1,036 $ 178 $ 112 $ 1,326 1.9 %
Automotive 2,048 467 18 2,533 3.7
Business products 1,513 111 57 1,681 2.5
Business services 3,083 203 210 3,496 5.2
Chemicals 776 40 46 862 1.3
Construction materials and contractors 1,876 238 244 2,358 3.5
Consumer discretionary 3,646 400 467 4,513 6.6
Consumer services 4,567 863 535 5,965 8.8
Equipment 1,428 76 98 1,602 2.4
Finance 6,186 64 386 6,636 9.7
Healthcare 3,000 1,564 331 4,895 7.2
Metals and mining 1,117 44 41 1,202 1.8
Oil and gas 2,219 54 90 2,363 3.5
Public exposure 2,422 24 706 3,152 4.6
Commercial real estate 5,126 10,469 12 15,607 22.9
Technology 916 27 182 1,125 1.6
Transportation 1,298 218 737 2,253 3.3
Utilities 5,560 2 397 5,959 8.8
Other 478 7 19 504 .7
Total $ 48,295 $ 15,049 $ 4,688 $ 68,032 100.0 %
Commercial and industrial . Commercial and industrial loans are the largest component of our loan portfolio, representing 52% of our total loan portfolio at December 31, 2020, and 51% at December 31, 2019. This portfolio is approximately 73% variable rate and consists of loans primarily to large corporate, middle market, and small business clients.

Commercial and industrial loans totaled $52.9 billion at December 31, 2020, an increase of $4.6 billion compared to December 31, 2019. The growth was broad-based and spread across most industry categories, as the impact of COVID-19 resulted in an outstanding balance of $6.7 billion related to the PPP partially offset by a decline in commercial line utilization rates.

Commercial real estate loans . Our commercial real estate lending business includes both mortgage and construction loans, and is conducted through two primary sources: our 15-state banking franchise, and KeyBank Real Estate Capital, a national line of business that cultivates relationships with owners of commercial real estate located both within and beyond the branch system. Nonowner-occupied properties, generally properties for which at least 50% of the debt service is provided by rental income from nonaffiliated third parties, represented 80% of total commercial real estate loans outstanding at December 31, 2020. Construction loans, which provide a stream of
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funding for properties not fully leased at origination to support debt service payments over the term of the contract or project, represented 14% of commercial real estate loans at year end .

At December 31, 2020, commercial real estate loans totaled $14.7 billion, comprised of $12.7 billion of mortgage loans and $2.0 billion of construction loans. Compared to December 31, 2019, this portfolio decreased $375 million, driven by declines in retail properties and office buildings. The impact of e-commerce accelerated by the pandemic resulted in retailers downsizing to smaller, more efficient spaces, with collaborative workspace and open offices losing appeal. Remote working and the need for flexibility in space and leasing is driving the move away from central business district (CBD) markets to lower density regions.

As shown in Figure 12, our commercial real estate loan portfolio includes various property types and geographic locations of the underlying collateral. These loans include commercial mortgage and construction loans in both Consumer Bank and Commercial Bank.

Figure 12. Commercial Real Estate Loans
Geographic Region
dollars in millions West Southwest Central Midwest Southeast Northeast National Total Percent of Total Construction
Commercial
Mortgage
December 31, 2020
Nonowner-occupied:
Retail properties $ 119 $ 15 $ 129 $ 122 $ 72 $ 448 $ 122 $ 1,027 6.8 % $ 54 $ 973
Multifamily properties 685 228 875 800 1,284 1,493 229 5,594 38.1 1,442 4,152
Health facilities 83 53 85 87 170 487 338 1,303 8.7 91 1,212
Office buildings 276 — 253 142 193 628 147 1,639 11.2 48 1,591
Warehouses 54 31 66 40 52 259 161 663 4.6 74 589
Manufacturing facilities 42 — 28 15 40 34 43 202 1.3 10 192
Hotels/Motels 76 — 19 — 12 107 91 305 2.1 18 287
Residential properties — — — 3 — 53 — 56 .4 — 56
Land and development 15 5 — 2 5 28 — 55 .4 33 22
Other 108 22 6 93 69 245 279 822 6.4 65 757
Total nonowner-occupied 1,458 354 1,461 1,304 1,897 3,782 1,410 11,666 80.0 1,835 9,831
Owner-occupied 870 4 275 499 63 1,297 — 3,008 20.0 152 2,856
Total $ 2,328 $ 358 $ 1,736 $ 1,803 $ 1,960 $ 5,079 $ 1,410 $ 14,674 100.0 % $ 1,987 $ 12,687
Nonowner-occupied:
Nonperforming loans $ 1 — — $ 7 $ 6 $ 44 $ 44 $ 103 N/M $ — $ 103
Accruing loans past due 90 days or more
— — — 1 — 22 — 22 N/M 1 21
Accruing loans past due 30 through 89 days
3 — — 2 3 7 — 14 N/M — 14
December 31, 2019
Nonowner-occupied:
Retail properties $ 133 $ 41 $ 143 $ 155 $ 161 $ 580 $ 124 $ 1,337 8.9 % $ 85 $ 1,252
Multifamily properties 698 354 767 795 1,205 1,350 225 5,394 35.8 1,189 4,205
Health facilities 76 44 104 93 163 497 405 1,382 9.2 40 1,342
Office buildings 214 7 293 132 244 725 134 1,749 11.6 69 1,680
Warehouses 51 34 51 51 46 238 134 605 4.0 7 598
Manufacturing facilities 36 — 38 4 40 43 54 215 1.4 5 210
Hotels/Motels 76 — 19 — 12 129 57 293 1.9 6 287
Residential properties — — — 2 — 98 — 100 .7 5 95
Land and development 20 5 — 3 2 9 — 39 .3 34 5
Other 80 9 71 86 22 259 358 885 5.9 23 862
Total nonowner-occupied 1,384 494 1,486 1,321 1,895 3,928 1,491 11,999 79.7 1,463 10,536
Owner-occupied 833 4 285 536 71 1,321 — 3,050 20.3 95 2,955
Total $ 2,217 $ 498 $ 1,771 $ 1,857 $ 1,966 $ 5,249 $ 1,491 $ 15,049 100.0 % $ 1,558 $ 13,491
Nonperforming loans $ 1 — — $ 7 7 $ 20 $ 52 $ 87 N/M 2 $ 85
Accruing loans past due 90 days or more
— — — 2 $ — 11 — 13 N/M $ 1 12
Accruing loans past due 30 through 89 days
1 — $ — 7 — 8 — 16 N/M 2 14
West – Alaska, California, Hawaii, Idaho, Montana, Oregon, Washington, and Wyoming
Southwest – Arizona, Nevada, and New Mexico
Central – Arkansas, Colorado, Oklahoma, Texas, and Utah
Midwest – Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin
Southeast – Alabama, Delaware, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, Washington, D.C., and West Virginia
Northeast – Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont
National – Accounts in three or more regions

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Consumer loan portfolio

Consumer loans outstanding at December 31, 2020, totaled $29.2 billion, an increase of $2.6 billion, or 9.7%, from one year ago, driven by strength from Laurel Road and Key’s consumer mortgage business. On October 21, 2020, we announced that we would no longer originate indirect auto loans. The current portfolio of approximately $4.6 billion will run off over time.

The home equity portfolio is comprised of loans originated by our Consumer Bank within our 15-state footprint and is the largest segment of our consumer loan portfolio, representing approximately 32% of consumer loans outstanding at year end.

We held the first lien position for approximately 66% of the Consumer Bank home equity portfolio at December 31, 2020, and 61% at December 31, 2019. For loans with real estate collateral, we track borrower performance monthly. Regardless of the lien position, credit metrics are refreshed quarterly, including recent FICO scores as well as original and updated loan-to-value ratios. This information is used in establishing the ALLL. Our methodology is described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan and Lease Losses.”

Figure 13. Consumer Loans by State
December 31, 2020 Real estate — residential mortgage Home equity loans Consumer direct loans Credit cards Consumer indirect loans Total
State
New York $ 1,164 $ 2,553 $ 593 $ 353 $ 731 $ 5,394
Ohio 698 1,375 479 217 957 3,726
Washington 1,835 1,300 236 86 20 3,477
Pennsylvania 516 14 303 4 19 856
California 286 648 255 52 539 1,780
Texas 74 7 241 3 10 335
Colorado 828 345 140 30 6 1,349
Connecticut 914 352 87 25 141 1,519
Oregon 720 782 97 41 4 1,644
Massachusetts 239 48 103 5 460 855
Other 2,024 1,936 2,180 173 1,957 8,270
Total $ 9,298 $ 9,360 $ 4,714 $ 989 $ 4,844 $ 29,205
December 31, 2019
New York $ 1,146 $ 2,655 $ 548 $ 404 $ 797 $ 5,550
Ohio 601 1,458 461 247 827 3,594
Washington 1,126 1,546 252 102 8 3,034
Connecticut 282 677 189 55 477 1,680
Pennsylvania 1,029 375 68 26 154 1,652
Oregon 517 852 94 48 2 1,513
Colorado 544 428 109 34 2 1,117
Massachusetts 123 434 71 38 359 1,025
California 117 412 131 47 118 825
Texas 257 48 62 6 437 810
Other 1,281 1,389 1,528 123 1,493 5,814
Total $ 7,023 $ 10,274 $ 3,513 $ 1,130 $ 4,674 $ 26,614


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Loan sales

As shown in Figure 14, during 2020, we sold $14.1 billion of our loans. Sales of loans classified as held for sale generated net gains of $233 million during 2020.

Figure 14 summarizes our loan sales during 2020 and 2019.

Figure 14. Loans Sold (Including Loans Held for Sale)
in millions Commercial
Commercial
Real Estate
Commercial
Lease
Financing
Residential
Real Estate
Consumer Direct Total
2020
Fourth quarter $ 197 $ 2,412 $ 135 $ 1,256 — $ 4,000
Third quarter 163 1,999 67 1,235 $ 208 3,672
Second quarter 82 2,661 47 925 — 3,715
First quarter 55 2,022 81 546 — 2,704
Total $ 497 $ 9,094 $ 330 $ 3,962 $ 208 $ 14,091
2019
Fourth quarter $ 50 $ 3,138 $ 222 $ 559 — $ 3,969
Third quarter 220 2,600 68 569 247 3,704
Second quarter 154 1,864 96 329 — 2,443
First quarter 301 1,536 34 225 — 2,096
Total $ 725 $ 9,138 $ 420 $ 1,682 247 $ 12,212

Figure 15 shows loans that are either administered or serviced by us but not recorded on the balance sheet; this includes loans that were sold.

Figure 15. Loans Administered or Serviced
December 31,
in millions
2020 2019 2018 2017 2016
Commercial real estate loans $ 371,016 $ 347,186 $ 291,158 $ 238,718 $ 218,135
Residential mortgage 8,311 6,146 5,209 4,582 4,198
Education loans 516 625 766 932 1,122
Commercial lease financing 1,359 1,047 916 862 899
Commercial loans 684 591 549 488 418
Consumer direct 1,711 2,243 — — —
Total $ 383,597 $ 357,838 $ 298,598 $ 245,582 $ 224,772
In the event of default by a borrower, we are subject to recourse with respect to approximately $5.8 billion of the $384 billion of loans administered or serviced at December 31, 2020. Additional information about this recourse arrangement is included in Note 22 (“Commitments, Contingent Liabilities, and Guarantees”) under the heading “Recourse agreement with FNMA.”

We derive income from several sources when retaining the right to administer or service loans that are sold. We earn noninterest income (recorded as “Consumer mortgage income” and “Commercial mortgage servicing fees”) from fees for servicing or administering loans. This fee income is reduced by the amortization of related servicing assets. In addition, we earn interest income from investing funds generated by escrow deposits collected in connection with the servicing loans. Additional information about our mortgage servicing assets is included in Note 9 (“Mortgage Servicing Assets”).


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Maturities and sensitivity of certain loans to changes in interest rates

Figure 16 shows the remaining maturities of certain commercial and real estate loans, and the sensitivity of those loans to changes in interest rates. At December 31, 2020, approximately 23% of these outstanding loans were scheduled to mature within one year.

Figure 16. Remaining Maturities and Sensitivity of Certain Loans to Changes in Interest Rates
December 31, 2020
in millions Within One Year One - Five Years Over Five Years Total
Commercial and industrial $ 11,496 $ 34,546 $ 6,866 $ 52,907
Real estate — construction 944 726 316 1,987
Total $ 12,440 $ 35,272 $ 7,182 $ 54,894
Loans with floating or adjustable interest rates (a)
$ 25,476 $ 3,897 $ 29,373
Loans with predetermined interest rates (b)
9,796 3,285 13,081
Total $ 35,272 $ 7,182 $ 42,454
(a) Floating and adjustable rates vary in relation to other interest rates (such as the base lending rate) or a variable index that may change during the term of the loan.
(b) Predetermined interest rates either are fixed or may change during the term of the loan according to a specific formula or schedule.
Securities
Our securities portfolio totaled $35.2 billion at December 31, 2020, compared to $31.9 billion at December 31, 2019. Available-for-sale securities were $27.6 billion at December 31, 2020, compared to $21.8 billion at December 31, 2019. Held-to-maturity securities were $7.6 billion at December 31, 2020, compared to $10.1 billion at December 31, 2019.
As shown in Figure 17, all of our mortgage-backed securities, which include both securities available-for-sale and held-to-maturity securities, are issued by government-sponsored enterprises or GNMA, and are traded in liquid secondary markets. These securities are recorded on the balance sheet at fair value for the available-for-sale portfolio and at cost for the held-to-maturity portfolio. For more information about these securities, see Note 6 (“Fair Value Measurements”) under the heading “Qualitative Disclosures of Valuation Techniques,” and Note 7 (“Securities”).
Figure 17. Mortgage-Backed Securities by Issuer
December 31,
in millions
2020 2019
FHLMC $ 8,782 $ 5,115
FNMA 13,213 12,308
GNMA 12,109 14,112
Total (a)
$ 34,104 $ 31,535
(a) Includes securities held in the available-for-sale and held-to-maturity portfolios.

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Securities available for sale

The majority of our securities available-for-sale portfolio consists of Federal Agency CMOs and mortgage-backed securities. CMOs are debt securities secured by a pool of mortgages or mortgage-backed securities. These mortgage securities generate interest income, serve as collateral to support certain pledging agreements, and provide liquidity value under regulatory requirements.

We periodically evaluate our securities available-for-sale portfolio in light of established A/LM objectives, changing market conditions that could affect the profitability of the portfolio, the regulatory environment, and the level of interest rate risk to which we are exposed. These evaluations may cause us to take steps to adjust our overall balance sheet positioning.

In addition, the size and composition of our securities available-for-sale portfolio could vary with our needs for liquidity and the extent to which we are required (or elect) to hold these assets as collateral to secure public funds and trust deposits. Although we generally use debt securities for this purpose, other assets, such as securities purchased under resale agreements or letters of credit, are used occasionally when they provide a lower cost of collateral or more favorable risk profiles.

Our investing activities continue to complement other balance sheet developments and provide for our ongoing liquidity management needs. Our actions to not reinvest the monthly security cash flows at various times served to provide the liquidity necessary to address our funding requirements. These funding requirements included ongoing loan growth and occasional debt maturities. At other times, we may make additional investments that go beyond the replacement of maturities or mortgage security cash flows as our liquidity position and/or interest rate risk management strategies may require. Lastly, our focus on investing in high quality liquid assets, including GNMA-related securities, is related to liquidity management strategies to satisfy regulatory requirements.

Figure 18 shows the composition, TE yields, and remaining maturities of our securities available for sale. For more information about these securities, including gross unrealized gains and losses by type of security and securities pledged, see Note 7 (“Securities”).

Figure 18. Securities Available for Sale
dollars in millions U.S. Treasury, Agencies, and Corporations States and Political Subdivisions
Agency Residential Collateralized Mortgage Obligations (a)
Agency Residential Mortgage-backed Securities (a),(b)
Agency Commercial Mortgage-backed Securities (a)
Other
Securities 		Total
Weighted-Average Yield (b)
December 31, 2020
Remaining maturity:
One year or less $ 1,000 $ — $ 883 $ 1 — $ 12 $ 1,896 0.63 %
After one through five years — — 10,257 2,145 $ 3,489 — 15,891 2.08
After five through ten years — — 3,133 16 3,814 1 6,964 2.84
After ten years — — — 2 2,803 — 2,805 1.35
Fair value $ 1,000 $ — $ 14,273 $ 2,164 $ 10,106 $ 13 $ 27,556 —
Amortized cost 1,000 — 14,001 2,094 9,707 8 26,810 2.09 %
Weighted-average yield (b)
0.16 % — 1.78 % 1.99 % 2.77 % .05 % 2.09 % —
Weighted-average maturity
— years — years 3.8 years 3.6 years 7.5 years .7 years 4.5 years —
December 31, 2019
Fair value $ 334 $ 4 $ 12,783 $ 1,714 $ 6,997 $ 11 $ 21,843 —
Amortized cost 334 4 12,772 1,677 6,898 7 21,692 2.52 %
(a) Maturity is based upon expected average lives rather than contractual terms.
(b) Weighted-average yields are calculated based on amortized cost. Such yields have been adjusted to a TE basis using the statutory federal income tax rate in effect that calendar year.


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Held-to-maturity securities
Federal Agency CMOs and mortgage-backed securities constitute essentially all of our held-to-maturity securities. The remaining balance comprises asset-back securities and foreign bonds. Figure 19 shows the composition, yields, and remaining maturities of these securities.
Figure 19. Held-to-Maturity Securities
dollars in millions
Agency Residential Collateralized Mortgage Obligations (a)
Agency Residential Mortgage-backed Securities (a)
Agency Commercial Mortgage-backed Securities (a)
Asset-backed securities Other
Securities 		Total
Weighted-Average Yield (b)
December 31, 2020
Remaining maturity:
One year or less $ 70 — — $ 4 $ 3 $ 77 2.49 %
After one through five years 2,903 $ 234 $ 1,777 15 12 4,941 2.40
After five through ten years 802 37 1,738 — — 2,577 2.58
After ten years — — — — — — —
Amortized cost $ 3,775 $ 271 $ 3,515 $ 19 $ 15 $ 7,595 2.46 %
Fair value 3,899 285 3,805 19 15 8,023 —
Weighted-average yield (b)
2.11 % 2.50 % 2.83 % 1.72 % 3.01 % 2.46 % —
Weighted-average maturity
3.7 years 4.4 years 5.0 years 2.8 years 2.0 years 4.3 years —
December 31, 2019
Amortized cost $ 5,692 $ 409 $ 3,940 11 $ 15 $ 10,067 2.43 %
Fair value 5,666 415 4,009 11 15 10,116 —
(a) Maturity is based upon expected average lives rather than contractual terms.
(b) Weighted-average yields are calculated based on amortized cost. Such yields have been adjusted to a TE basis using the statutory federal income tax rate in effect that calendar year.


Deposits and other sources of funds

Figure 20. Breakdown of Deposits at December 31, 2020
key-20201231_g40.jpg key-20201231_g41.jpg Deposits are our primary source of funding. At December 31, 2020, our deposits totaled $135.3 billion, an increase of $23.4 billion, compared to December 31, 2019. The increase in deposits compared to the prior year reflects the impact of PPP and government stimulus programs, in addition to our strategy to acquire and expand client relationships.

Wholesale funds, consisting of short-term borrowings and long-term debt, totaled $14.7 billion at December 31, 2020, compared to $13.5 billion at December 31, 2019. The increase from the prior year reflects our balance sheet optimization strategy.
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Figure 21 shows the maturity distribution of time deposits of $100,000 or more.
Figure 21. Maturity Distribution of Time Deposits of $100,000 or More
December 31, 2020 Total
in millions
Remaining maturity:
Three months or less $ 701
After three through six months 773
After six through twelve months 835
After twelve months 424
Total $ 2,733

Capital

The objective of management of capital is to maintain capital levels consistent with our risk appetite and sufficient in size to operate within a wide range of operating environments. We have identified three primary uses of capital:

1. Investing in our businesses, supporting our clients, and loan growth;
2.    Maintaining or increasing our Common Share dividend; and
3.    Returning capital in the form of Common Share repurchases to our shareholders.

The following sections discuss certain ways we have deployed our capital. For further information, see the Consolidated Statements of Changes in Equity and Note 24 (“Shareholders' Equity”).
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(a) Common Share repurchases were suspended during the third quarter of 2015 due to the then pending merger with First Niagara. We resumed our Common Share repurchase program during the third quarter of 2016 upon the completion of the First Niagara merger. Common Share repurchases were suspended during the second, third and fourth quarters of 2020 in response to the COVID-19 pandemic.

Dividends
Consistent with our capital plans, the Board declared a quarterly dividend of $.185 per Common Share for each quarter of 2020. These quarterly dividend payments brought our annual dividend to $.74 per Common Share for 2020.
Common Shares outstanding
Our Common Shares are traded on the NYSE under the symbol KEY with 32,099 holders of record at December 31, 2020. Our book value per Common Share was $16.53 based on 975.8 million shares outstanding at December 31, 2020, compared to $15.54 based on 977.2 million shares outstanding at December 31, 2019. At December 31, 2020, our tangible book value per Common Share was $13.61, compared to $12.56 at December 31, 2019.
Figure 35 in the section entitled “Fourth Quarter Results” shows per Common Share earnings and dividends paid by quarter for each of the last two years.
Figure 22 shows activities that caused the change in our outstanding Common Shares over the past two years.
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Figure 22. Changes in Common Shares Outstanding
2020 Quarters
in thousands 2020 Fourth Third Second First 2019
Shares outstanding at beginning of period 977,189 976,205 975,947 975,319 977,189 1,019,503
Open market repurchases and return of shares under employee compensation plans (8,974) (1,092) (1) (19) (7,862) (50,247)
Shares issued under employee compensation plans (net of cancellations) 7,558 660 259 647 5,992 7,933
Shares outstanding at end of period 975,773 975,773 976,205 975,947 975,319 977,189
During 2020, Common Shares outstanding decreased by 1.4 million shares due to Common Share repurchases under our 2019 and 2020 capital plans.
At December 31, 2020, we had 280.9 million treasury shares, compared to 279.5 million treasury shares at December 31, 2019. Going forward, we expect to reissue treasury shares as needed in connection with stock-based compensation awards and for other corporate purposes.
Capital adequacy
Capital adequacy is an important indicator of financial stability and performance. All of our capital ratios remained in excess of regulatory requirements at December 31, 2020. Our capital and liquidity levels are intended to position us to weather an adverse operating environment while continuing to serve our clients’ needs, as well as to meet the Regulatory Capital Rules described in the “Supervision and regulation” section of Item 1 of this report. Our shareholders’ equity to assets ratio was 10.56% at December 31, 2020, compared to 11.75% at December 31, 2019. Our tangible common equity to tangible assets ratio was 7.93% at December 31, 2020, compared to 8.64% at December 31, 2019. The new minimum capital and leverage ratios under the Regulatory Capital Rules together with the estimated ratios of KeyCorp at December 31, 2020, calculated on a fully phased-in basis, are set forth under the heading “Basel III” in the “Supervision and Regulation” section in Item 1 of this report.

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Figure 23 represents the details of our regulatory capital positions at December 31, 2020, and December 31, 2019, under the Regulatory Capital Rules. Information regarding the regulatory capital ratios of KeyCorp’s banking subsidiaries is presented in Note 24 (“Shareholders' Equity”).
Figure 23. Capital Components and Risk-Weighted Assets
December 31,
dollars in millions
2020 2019
COMMON EQUITY TIER 1
Key shareholders’ equity (GAAP) $ 17,981 $ 17,038
Less:
Preferred Stock (a)
1,856 1,856
Add:
CECL phase-in (b)
375 —
Common Equity Tier 1 capital before adjustments and deductions 16,500 15,182
Less: Goodwill, net of deferred taxes 2,560 2,584
Intangible assets, net of deferred taxes 151 207
Deferred tax assets 1 9
Net unrealized gains (losses) on available-for-sale securities, net of deferred taxes 583 115
Accumulated gains (losses) on cash flow hedges, net of deferred taxes 460 250
Amounts in AOCI attributed to pension and postretirement benefit costs, net of deferred taxes (306) (339)
Total Common Equity Tier 1 capital 13,051 12,356
TIER 1 CAPITAL
Common Equity Tier 1 13,051 12,356
Additional Tier 1 capital instruments and related surplus 1,856 1,856
Less: Deductions — —
Total Tier 1 capital 14,907 14,212
TIER 2 CAPITAL
Tier 2 capital instruments and related surplus 1,657 1,546
Allowance for losses on loans and liability for losses on lending-related commitments (b)
1,412 978
Less: Deductions — —
Total Tier 2 capital 3,069 2,524
Total risk-based capital $ 17,976 $ 16,736
RISK-WEIGHTED ASSETS
Risk-weighted assets on balance sheet $ 103,604 $ 102,441
Risk-weighted off-balance sheet exposure 29,240 27,303
Market risk-equivalent assets 1,354 1,121
Gross risk-weighted assets 134,198 130,865
Less: Excess allowance for loan and lease losses — —
Net risk-weighted assets $ 134,198 $ 130,865
AVERAGE QUARTERLY TOTAL ASSETS $ 166,771 $ 143,910
CAPITAL RATIOS
Tier 1 risk-based capital 11.11 % 10.86 %
Total risk-based capital 13.40 12.79
Leverage (c)
8.94 9.88
Common Equity Tier 1 9.73 9.44
(a) Net of capital surplus.
(b) Amount reflects our decision to adopt the CECL transitional provision.
(c) The ALLL included in Tier 2 capital is limited by regulation to 1.25% of the institution’s standardized total risk-weighted assets (excluding its standardized market risk-weighted assets). The ALLL includes $36 million and $10 million of allowance classified as “discontinued assets” on the balance sheet at December 31, 2020, and December 31, 2019, respectively.
(d) This ratio is Tier 1 capital divided by average quarterly total assets as defined by the Federal Reserve less: (i) goodwill, (ii) the disallowed intangible and deferred tax assets, and (iii) other deductions from assets for leverage capital purposes.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Off-balance sheet arrangements
We are party to various types of off-balance sheet arrangements, which could lead to contingent liabilities or risks of loss that are not reflected on the balance sheet.
Variable interest entities
In accordance with the applicable accounting guidance for consolidations, we consolidate a VIE if we have: (i) a variable interest in the entity; (ii) the power to direct activities of the VIE that most significantly impact the entity’s economic performance; and (iii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE (i.e., we are considered to be the primary beneficiary). Additional information regarding the nature of VIEs and our involvement with them is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Principles of Consolidation and Basis of Presentation” and in Note 13 (“Variable Interest Entities”).
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Commitments to extend credit or funding
Loan commitments provide for financing on predetermined terms as long as the client continues to meet specified criteria. These commitments generally carry variable rates of interest and have fixed expiration dates or other termination clauses. We typically charge a fee for our loan commitments. Since a commitment may expire without resulting in a loan or being fully utilized, the total amount of an outstanding commitment may significantly exceed any related cash outlay. Further information about our loan commitments at December 31, 2020, is presented in Note 22 (“Commitments, Contingent Liabilities, and Guarantees”) under the heading “Commitments to Extend Credit or Funding.” Figure 24 shows the remaining contractual amount of each class of commitment to extend credit or funding. For loan commitments and commercial letters of credit, this amount represents our maximum possible accounting loss on the unused commitment if the borrower were to draw upon the full amount of the commitment and subsequently default on payment for the total amount of the then outstanding loan.

Other off-balance sheet arrangements
Other off-balance sheet arrangements include financial instruments that do not meet the definition of a guarantee in accordance with the applicable accounting guidance, and other relationships, such as liquidity support provided to asset-backed commercial paper conduits, indemnification agreements and intercompany guarantees. Information about such arrangements is provided in Note 22 under the heading “Other Off-Balance Sheet Risk.”
Contractual obligations
Figure 24 summarizes our significant contractual obligations, and lending-related and other off-balance sheet commitments at December 31, 2020, by the specific time periods in which related payments are due or commitments expire.
Figure 24. Contractual Obligations and Other Off-Balance Sheet Commitments
December 31, 2020
Within 1
year
After 1
through 3
years
After 3
through 5
years
After 5
years
Total
in millions
Contractual obligations: (a)
Deposits with no stated maturity $ 129,539 — — — $ 129,539
Time deposits of $100,000 or more 2,309 $ 378 $ 38 $ 8 2,733
Other time deposits 2,382 527 91 10 3,010
Federal funds purchased and securities sold under repurchase agreements
220 — — — 220
Bank notes and other short-term borrowings 759 — — — 759
Long-term debt 2,587 3,634 2,435 5,053 13,709
Noncancellable operating leases 143 252 178 236 809
Liability for unrecognized tax benefits 58 — — — 58
Purchase obligations (b)
213 277 70 5 565
Total $ 138,210 $ 5,068 $ 2,812 $ 5,312 $ 151,402
Lending-related and other off-balance sheet commitments:
Commercial, including real estate $ 17,903 $ 19,650 $ 11,719 $ 885 $ 50,157
Home equity 490 510 613 7,686 9,299
Credit cards 6,685 — — — 6,685
Purchase cards 708 — — — 708
Commercial letters of credit 61 7 6 — 74
Principal investing commitments 11 5 — — 16
Tax credit investment commitments 487 — — — 487
Total $ 26,345 $ 20,171 $ 12,338 $ 8,571 $ 67,426
(a) Deposits and borrowings exclude interest.
(b) Includes purchase obligations for goods and services covered by noncancellable contracts and contracts including cancellation fees.
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Guarantees
We are a guarantor in various agreements with third parties. As guarantor, we may be contingently liable to make payments to the guaranteed party based on changes in a specified interest rate, foreign exchange rate or other variable (including the occurrence or nonoccurrence of a specified event). These variables, known as underlyings, may be related to an asset or liability, or another entity’s failure to perform under a contract. Additional information regarding these types of arrangements is presented in Note 22 (“Commitments, Contingent Liabilities, and Guarantees”) under the heading “Guarantees.”
Risk Management
Overview
Like all financial services companies, we engage in business activities and assume the related risks. The most significant risks we face are credit, compliance, operational, liquidity, market, reputation, strategic, and model risks. Our risk management activities are shown in the following chart, and we manage such risks across the entire enterprise to maintain safety and soundness and maximize profitability. Certain of these risks are defined and discussed in greater detail in the remainder of this section.
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Federal banking regulators continue to emphasize with financial institutions the importance of relating capital management strategy to the level of risk at each institution. We believe our internal risk management processes help us achieve and maintain capital levels that are commensurate with our business activities and risks, and conform to regulatory expectations. The table below depicts our risk management hierarchy and associated responsibilities and activities of each group.

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Group Overview and Responsibilities Activities
Board of Directors
– Oversight capacity
– Ensure Key’s risks are managed in a manner that is not only effective and balanced, but also has a fiduciary duty to the shareholders

– Understands Key's risk philosophy
– Approves the risk appetite
– Inquires about risk practices
– Reviews the portfolio of risks
– Compares the actual risks to the risk appetite
– Is apprised of significant risks, both actual and emerging, and determines whether management is responding appropriately
– Challenges management and ensures accountability
Board of Directors Audit Committee (a)
– Oversight of financial statement integrity, regulatory and legal requirements, independent auditors’ qualifications and independence, and the performance of the internal audit function and independent auditors
– Financial reporting, legal matters, and fraud risk
– Meets with management and approves significant policies relating to the risk areas overseen by the Audit Committee
– Receives reports on enterprise risk
– Meets bi-monthly
– Convenes to discuss the content of our financial disclosures and quarterly earnings releases
Board of Directors Risk Committee (a)
– Assist the Board in oversight of strategies, policies, procedures, and practices relating to the assessment and management of enterprise-wide risk, including credit, market, liquidity, model, operational, compliance, reputation, and strategic risks
– Assist the Board in overseeing risks related to capital adequacy, capital planning, and capital actions
– Reviews and provides oversight of management’s activities related to the enterprise-wide risk management framework, which includes an annual review of the ERM Policy, including the Risk Appetite Statement, and management and ERM reports
– Approves any material changes to the charter of the ERM Committee and significant policies relating to risk management, including corporate risk tolerances for major risk categories
ERM Committee
– Chaired by the Chief Executive Officer and comprising other senior level executives
– Manage risk and ensure that the corporate risk profile is managed in a manner consistent with our risk appetite
– Oversees the ERM Program, which encompasses our risk philosophy, policy, framework, and governance structure for the management of risks across the entire company
– Approves and manages the risk-adjusted capital framework we use to manage risks

Disclosure Committee
– Includes representatives from each of the Three Lines of Defense
– Meets quarterly to review recent internal and external events to determine whether all appropriate disclosures have been made in reports filed with the SEC
– Convenes quarterly to discuss the content of our 10-Q and 10-K

Tier 2 Risk Governance Committees
– Include attendees from each of the Three Lines of Defense
– The First Line of Defense is the line of business primarily responsible to accept, own, proactively identify, monitor, and manage risk
– The Second Line of Defense comprises Risk Management representatives who provide independent, centralized oversight over all risk categories by aggregating, analyzing, and reporting risk information
– Risk Review, our internal audit function, provides the Third Line of Defense. Its role is to provide independent assessment and testing of the effectiveness of, appropriateness of, and adherence to KeyCorp’s risk management policies, practices, and controls
– Supports the ERM Committee by identifying early warning events and trends, escalating emerging risks, and discussing forward-looking assessments
Chief Risk Officer
– Ensure that relevant risk information is properly integrated into strategic and business decisions
– Ensure appropriate ownership of risks
– Provides input into performance and compensation decisions
– Assesses aggregate enterprise risk
– Monitors capabilities to manage critical risks
– Executes appropriate Board and stakeholder reporting
– The Audit and Risk Committees meet jointly, as appropriate, to discuss matters that relate to each committee’s responsibilities. Committee chairpersons routinely meet with management during interim months to plan agendas for upcoming meetings and to discuss emerging trends and events that have transpired since the preceding meeting. All members of the Board receive formal reports designed to keep them abreast of significant developments during the interim months.


Market risk management

Market risk is the risk that movements in market risk factors, including interest rates, foreign exchange rates, equity prices, commodity prices, credit spreads, and volatilities will reduce Key’s income and the value of its portfolios. These factors influence prospective yields, values, or prices associated with the instrument. We are exposed to market risk both in our trading and nontrading activities, which include asset and liability management activities. Information regarding our fair value policies, procedures, and methodologies is provided in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Fair Value Measurements” and Note 6 (“Fair Value Measurements”) in this report.

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Trading market risk

Key incurs market risk as a result of trading activities that are used in support of client facilitation and hedging activities, principally within our investment banking and capital markets businesses. Key has exposures to a wide range of risk factors including interest rates, equity prices, foreign exchange rates, credit spreads, and commodity prices, as well as the associated implied volatilities and spreads. Our primary market risk exposures are a result of trading and hedging activities in the derivative and fixed income markets, including securitization exposures. At December 31, 2020, we did not have any re-securitization positions. We maintain modest trading inventories to facilitate customer flow, make markets in securities, and hedge certain risks including but not limited to credit risk and interest rate risk. The risks associated with these activities are mitigated in accordance with the Market Risk hedging policy.  The majority of our positions are traded in active markets.

Management of trading market risks . Market risk management is an integral part of Key’s risk culture. The Risk Committee of our Board provides oversight of trading market risks. The ERM Committee and the Market Risk Committee regularly review and discuss market risk reports prepared by our MRM that contain our market risk exposures and results of monitoring activities. Market risk policies and procedures have been defined and approved by the Market Risk Committee, a Tier 2 Risk Governance Committee, and take into account our tolerance for risk and consideration for the business environment.

The MRM, as the second line of defense, is an independent risk management function that partners with the lines of business to identify, measure, and monitor market risks throughout our company. The MRM is responsible for ensuring transparency of significant market risks, monitoring compliance with established limits, and escalating limit exceptions to appropriate senior management. The various business units and trading desks are responsible for ensuring that market risk exposures are well-managed and prudent. Market risk is monitored through various measures, such as VaR, and through routine stress testing, sensitivity, and scenario analyses. The MRM conducts stress tests for each position using historical worst case and standard shock scenarios. VaR, stressed VaR, and other analyses are prepared daily and distributed to appropriate management.

Covered positions. We monitor the market risk of our covered positions as defined in the Market Risk Rule, which includes all of our trading positions as well as all foreign exchange and commodity positions, regardless of whether the position is in a trading account. Key’s covered positions may also include mortgage-backed and asset-backed securities that may be identified as securitization positions or re-securitization positions under the Market Risk Rule. The MRM as well as the LOB that trades securitization positions monitor the positions, the portfolio composition and the risks identified in this section on a daily basis consistent with the Market Risk policies and procedures. At December 31, 2020, covered positions did not include any re-securitization positions. Instruments that are used to hedge nontrading activities, such as bank-issued debt and loan portfolios, equity positions that are not actively traded, and securities financing activities, do not meet the definition of a covered position. The MRM is responsible for identifying our portfolios as either covered or non-covered. The Covered Position Working Group develops the final list of covered positions, and a summary is provided to the Market Risk Committee.

Our significant portfolios of covered positions are detailed below. We analyze market risk by portfolios of covered positions and do not separately measure and monitor our portfolios by risk type. The descriptions below incorporate the respective risk types associated with each of these portfolios.
• Fixed income includes those instruments associated with our capital markets business and the trading of securities as a dealer. These instruments may include positions in municipal bonds, bonds backed by the U.S. government, agency and corporate bonds, certain mortgage-backed and asset-backed securities, securities issued by the U.S. Treasury, money markets, and certain CMOs. The activities and instruments within the fixed income portfolio create exposures to interest rate and credit spread risks.
• Interest rate derivatives include interest rate swaps, caps, and floors, which are transacted primarily to accommodate the needs of commercial loan clients. In addition, we enter into interest rate derivatives to offset or mitigate the interest rate risk related to the client positions. The activities within this portfolio create exposures to interest rate risk.

VaR and stressed VaR. VaR is the estimate of the maximum amount of loss on an instrument or portfolio due to adverse market conditions during a given time interval within a stated confidence level. Stressed VaR is used to assess extreme conditions on market risk within our trading portfolios. The MRM calculates VaR and stressed VaR on a daily basis, and the results are distributed to appropriate management. VaR and stressed VaR results are also provided to our regulators and utilized in regulatory capital calculations.
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We use a historical simulation VaR model to measure the potential adverse effect of changes in interest rates, foreign exchange rates, equity prices, and credit spreads on the fair value of our covered positions and other non-covered positions. Historical scenarios are customized for specific positions, and numerous risk factors are incorporated in the calculation. Additional consideration is given to the risk factors to estimate the exposures that contain optionality features, such as options and cancelable provisions. VaR is calculated using daily observations over a one-year time horizon, and approximates a 95% confidence level. Statistically, this means that we would expect to incur losses greater than VaR, on average, five out of 100 trading days, or three to four times each quarter. We also calculate VaR and stressed VaR at a 99% confidence level.

The VaR model is an effective tool in estimating ranges of possible gains and losses on our positions. However, there are limitations inherent in the VaR model since it uses historical results over a given time interval to estimate future performance. Historical results may not be indicative of future results, and changes in the market or composition of our portfolios could have a significant impact on the accuracy of the VaR model. We regularly review and enhance the modeling techniques, inputs, and assumptions used. Our market risk policy includes the independent validation of our VaR model by Key’s internal model validation group on an annual basis. The Model Risk Committee oversees the Model Validation Program, and results of validations are discussed with the ERM Committee.

Actual losses for the total covered positions did not exceed aggregate daily VaR on any day during the quarters ended December 31, 2020, and December 31, 2019. The MRM backtests our VaR model on a daily basis to evaluate its predictive power. The test compares VaR model results at the 99% confidence level to daily held profit and loss. Results of backtesting are provided to the Market Risk Committee. Backtesting exceptions occur when trading losses exceed VaR. We do not engage in correlation trading or utilize the internal model approach for measuring default and credit migration risk. Our net VaR approach incorporates diversification, but our VaR calculation does not include the impact of counterparty risk and our own credit spreads on derivatives.

The aggregate VaR at the 99% confidence level with a one day holding period for all covered positions was $2.8 million at December 31, 2020, and $.9 million at December 31, 2019. Figure 25 summarizes our VaR at the 99% confidence level with a one day holding period for significant portfolios of covered positions for the three months ended December 31, 2020, and December 31, 2019.

Figure 25. VaR for Significant Portfolios of Covered Positions
2020 2019
Three months ended December 31, Three months ended December 31,
in millions High Low Mean December 31, High Low Mean December 31,
Trading account assets:
Fixed income $ 2.9 $ 1.4 $ 2.1 $ 2.1 $ 1.2 $ .6 $ .9 $ .8
Derivatives:
Interest rate $ 1.0 .2 $ .5 $ .5 $ .1 .1 $ .1 $ .1

Stressed VaR is calculated by running the portfolios through a predetermined stress period which is approved by the Market Risk Committee and is calculated at the 99% confidence level using the same model and assumptions used for general VaR. The aggregate stressed VaR for all covered positions was $2.8 million at December 31, 2020, and $5.1 million at December 31, 2019. Figure 26 summarizes our stressed VaR at the 99% confidence level with a one day holding period for significant portfolios of covered positions for the three months ended December 31, 2020, and December 31, 2019.

Figure 26. Stressed VaR for Significant Portfolios of Covered Positions
2020 2019
Three months ended December 31, Three months ended December 31,
in millions High Low Mean December 31, High Low Mean December 31,
Trading account assets:
Fixed income $ 2.9 $ 1.4 $ 2.1 $ 2.1 $ 5.7 $ 3.2 $ 4.5 $ 4.3
Derivatives:
Interest rate $ .9 $ .2 $ .5 $ .5 $ 1.2 $ .2 $ .4 $ .7



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Internal capital adequacy assessment. Market risk is a component of our internal capital adequacy assessment. Our risk-weighted assets include a market risk-equivalent asset amount, which consists of a VaR component, stressed VaR component, a de minimis exposure amount, and a specific risk add-on including the securitization positions. We had no securitization positions as defined by the Market Risk Rule at December 31, 2020. Specific risk is the price risk of individual financial instruments, which is not accounted for by changes in broad market risk factors and is measured through a standardized approach. Market risk weighted assets, including the specific risk calculations, are run quarterly by the MRM in accordance with the Market Risk Rule and approved by the Chief Market Risk Officer.

Nontrading market risk

Most of our nontrading market risk is derived from interest rate fluctuations and its impacts on our traditional loan and deposit products, as well as investments, hedging relationships, long-term debt, and certain short-term borrowings. Interest rate risk, which is inherent in the banking industry, is measured by the potential for fluctuations in net interest income and the EVE. Such fluctuations may result from changes in interest rates and differences in the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities. We manage the exposure to changes in net interest income and the EVE in accordance with our risk appetite and in accordance with the Board approved ERM policy.

Interest rate risk positions are influenced by a number of factors, including the balance sheet positioning that arises out of customer preferences for loan and deposit products, economic conditions, the competitive environment within our markets, changes in market interest rates that affect client activity, and our hedging, investing, funding, and capital positions. The primary components of interest rate risk exposure consist of reprice risk, basis risk, yield curve risk, and option risk.

• “Reprice risk ” is the exposure to changes in the level of interest rates and occurs when the volume of interest-bearing liabilities and the volume of interest-earning assets they fund (e.g., deposits used to fund loans) do not mature or reprice at the same time.
• “Basis risk” is the exposure to asymmetrical changes in interest rate indexes and occurs when floating-rate assets and floating-rate liabilities reprice at the same time, but in response to different market factors or indexes.
• “Yield curve risk” is the exposure to non-parallel changes in the slope of the yield curve (where the yield curve depicts the relationship between the yield on a particular type of security and its term to maturity) and occurs when interest-bearing liabilities and the interest-earning assets that they fund do not price or reprice to the same term point on the yield curve.
• “Option risk” is the exposure to a customer or counterparty’s ability to take advantage of the interest rate environment and terminate or reprice one of our assets, liabilities, or off-balance sheet instruments prior to contractual maturity without a penalty. Option risk occurs when exposures to customer and counterparty early withdrawals or prepayments are not mitigated with an offsetting position or appropriate compensation.

The management of nontrading market risk is centralized within Corporate Treasury. The Risk Committee of our Board provides oversight of nontrading market risk. The ERM Committee and the ALCO review reports on the interest rate risk exposures described above. In addition, the ALCO reviews reports on stress tests and sensitivity analyses related to interest rate risk. These committees have various responsibilities related to managing nontrading market risk, including recommending, approving, and monitoring strategies that maintain risk positions within approved tolerance ranges. The A/LM policy provides the framework for the oversight and management of interest rate risk and is administered by the ALCO. The MRM, as the second line of defense, provides additional oversight.

LIBOR Transition

As disclosed in Item 1A. Risk Factors of this report, LIBOR in its current form is not expected to be available after 2021 for new contracts and to cease publishing all tenors entirely after June 30, 2023. For most products, the most likely replacement rate is expected to be SOFR, which has been recommended by the ARRC, although uncertainty remains as to whether new benchmarks may evolve and a different credit sensitive benchmark could instead become the market-accepted benchmark. The Federal Reserve and the OCC have encouraged financial institutions not to wait for the end of 2021 to make the transition away from LIBOR. We have established an enterprise wide program to identify and address all LIBOR transition issues. We are collaborating closely with regulators and
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industry groups on the transition and closely monitoring developments in industry practices related to LIBOR alternatives. The goals of our LIBOR transition program are to:

• Identify and analyze LIBOR-based exposure and develop and execute transition strategies;
• Review and update near-term strategies and actions for our current LIBOR-based business currently being written;
• Assess financial impact and risk while planning and executing mitigation actions;
• Understand and strategically address the current market approach to LIBOR and SOFR; and
• Determine and execute system and process work to be operationally ready for SOFR or additional credit sensitive benchmarks.

As part of the LIBOR transition program, we completed an initial risk assessment to help us identify the impact and risks associated with various products, systems, processes, and models. This risk assessment has assisted us in making necessary updates to our infrastructure and operational systems and processes to implement a replacement rate, and we are progressing on schedule to be operationally ready for SOFR. We have compiled an inventory of existing legal contracts that are impacted by the LIBOR transition. We are assessing the LIBOR fallback language in those contracts and are devising a strategy to address the LIBOR transition for those contracts. We have also focused on refining LIBOR fallback language in new legal contracts including requiring the use of robust fallback language. Our progress is well-paced, especially as it is likely many of the legacy contracts will be provided additional time to remediate due to recent announcements by the ICE Benchmark Administration, the FCA-regulated and authorized administrator of LIBOR, that certain LIBOR tenors may continue until June 2023 for legacy contract purposes. We expect to leverage recommendations made by the ARRC and ISDA that are tailored to our specific client segments.

Net interest income simulation analysis. The primary tool we use to measure our interest rate risk is simulation analysis. For purposes of this analysis, we estimate our net interest income based on the current and projected composition of our on- and off-balance sheet positions, accounting for recent and anticipated trends in customer activity. The analysis also incorporates assumptions for the current and projected interest rate environments and balance sheet growth projections based on a most likely macroeconomic view. The modeling incorporates investment portfolio and swap portfolio balances consistent with management's desired interest rate risk positioning. The simulation model estimates the amount of net interest income at risk by simulating the change in net interest income that would occur if rates were to gradually increase or decrease over the next 12 months (subject to a floor on market interest rates at zero).

Figure 27 presents the results of the simulation analysis at December 31, 2020, and December 31, 2019. At December 31, 2020, our simulated impact to changes in interest rates was modest. Exposure to declining rates
remains nominal given the low level of market rates in comparison to the floor utilized in the scenario. Exposure to
rising rates has changed from a detriment in 2019 to a benefit currently as the lower actual market rates reduce the
need for additional modeled hedges and lower the projected deposit pricing beta to rising rates. Tolerance levels for risk management require the development of remediation plans to maintain residual risk within tolerance if simulation modeling demonstrates that a gradual, parallel 200 basis point increase or 200 basis point decrease in interest rates over the next 12 months would adversely affect net interest income over the same period by more than 5.5%. Current modeled exposure is within Board approved tolerances.

Figure 27. Simulated Change in Net Interest Income
December 31, 2020 December 31, 2019
Basis point change assumption (short-term rates) -200 +200 -150 +200
Assumed floor in market rates (in basis points) — N/A 25 N/A
Tolerance level -5.50 % -5.50 % -5.50 % -5.50 %
Interest rate risk assessment -2.52 % 4.98 % -2.47 % -1.45 %

Simulation analysis produces a sophisticated estimate of interest rate exposure based on assumptions input into the model. We tailor certain assumptions to the specific interest rate environment and yield curve shape being modeled and validate those assumptions on a regular basis. However, actual results may differ from those derived in simulation analysis due to unanticipated changes to the balance sheet composition, customer behavior, product pricing, market interest rates, changes in management’s desired interest rate risk positioning, investment, funding and hedging activities, and repercussions from unanticipated or unknown events.

We also perform regular stress tests and sensitivity analyses on the model inputs that could materially change the resulting risk assessments. Assessments are performed using different shapes of the yield curve, including
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steepening or flattening of the yield curve, immediate changes in market interest rates, and changes in the relationship of money market interest rates. Assessments are also performed on changes to the following assumptions: loan and deposit balances, the pricing of deposits without contractual maturities, changes in lending spreads, prepayments on loans and securities, investment, funding and hedging activities, and liquidity and capital management strategies.

The results of additional assessments indicate that net interest income could increase or decrease from the base simulation results presented in Figure 27. Net interest income is highly dependent on the timing, magnitude, frequency, and path of interest rate changes and the associated assumptions for deposit repricing relationships, lending spreads, and the balance behavior of transaction accounts. If fixed rate assets increase by $1 billion, or fixed rate liabilities decrease by $1 billion, then the benefit to rising rates would decrease by approximately 25 basis points. If the interest-bearing liquid deposit beta assumption increases or decreases by 5% (e.g., 40% to 45%), then the benefit to rising rates would decrease or increase by approximately 120 basis points.

Our current interest rate risk position could fluctuate to higher or lower levels of risk depending on the competitive environment and client behavior that may affect the actual volume, mix, maturity, and repricing characteristics of loan and deposit flows. Corporate Treasury discretionary activities related to funding, investing, and hedging may also change as a result of changes in customer business flows or changes in management’s desired interest rate risk positioning. As changes occur to both the configuration of the balance sheet and the outlook for the economy, management proactively evaluates hedging opportunities that may change our interest rate risk profile.

We also conduct simulations that measure the effect of changes in market interest rates in the second and third years of a three-year horizon. These simulations are conducted in a manner similar to those based on a 12-month horizon. To capture longer-term exposures, we calculate exposures to changes of the EVE as discussed in the following section.

Economic value of equity modeling. EVE complements net interest income simulation analysis as it estimates risk exposure beyond 12-, 24-, and 36-month horizons. EVE modeling measures the extent to which the economic values of assets, liabilities, and off-balance sheet instruments may change in response to fluctuations in interest rates. EVE is calculated by subjecting the balance sheet to an immediate 200 basis point increase or decrease in interest rates, measuring the resulting change in the values of assets, liabilities, and off-balance sheet instruments, and comparing those amounts with the base case of the current interest rate environment.  This analysis is highly dependent upon assumptions applied to assets and liabilities with non-contractual maturities. Those assumptions are based on historical behaviors, as well as our expectations. We develop remediation plans that would maintain residual risk within tolerance if this analysis indicates that our EVE will decrease by more than 15% in response to an immediate increase or decrease in interest rates. We are operating within these guidelines as of December 31, 2020.

Management of interest rate exposure. We use the results of our various interest rate risk analyses to formulate A/LM strategies to achieve the desired risk profile while managing to our objectives for capital adequacy and liquidity risk exposures. Specifically, we manage interest rate risk positions by purchasing securities, issuing term debt with floating or fixed interest rates, and using derivatives. We predominantly use interest rate swaps and options, which modify the interest rate characteristics of certain assets and liabilities.

Figure 28 shows all derivative positions that we hold for A/LM purposes. The swap positions are used to convert the contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional amounts) to another interest rate index. For example, fixed-rate debt is converted to a floating rate through a “receive fixed/pay variable” interest rate swap. The volume, maturity, and mix of portfolio swaps change frequently as we adjust our broader A/LM objectives and the balance sheet positions to be hedged. For more information about how we use interest rate swaps to manage our risk profile, see Note 8 (“Derivatives and Hedging Activities”).

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Figure 28. Portfolio Swaps and Options by Interest Rate Risk Management Strategy
December 31, 2020
Weighted-Average December 31, 2019
dollars in millions Notional
Amount 		Fair
Value 		Maturity
(Years) 		Receive
Rate 		Pay
Rate 		Notional
Amount 		Fair
Value
Receive fixed/pay variable — conventional A/LM (a)
$ 21,035 $ 632 2.4 1.8 % .2 % $ 19,270 $ 312
Receive fixed/pay variable — conventional debt 7,787 415 3.8 2.1 .1 8,189 240
Receive fixed/pay variable — forward A/LM — — — — — 3,400 32
Pay fixed/receive variable — conventional debt 50 (11) 7.5 .2 3.6 50 (7)
Pay fixed/receive variable — forward securities 2,080 21 11.2 .3 1.0 — —
Total portfolio swaps $ 30,952 $ 1,057
(c)
3.4 1.8 % .2 % $ 30,909 $ 577
(c)
Floors — conventional A/LM — purchased (b)
$ 5,000 $ 17 .8 — — $ 4,200 149
Floors — conventional A/LM — sold (b)
— — — — — 3,900 (15)
Total floors $ 5,000 $ 17 1.0 — — $ 8,100 134
(a) Portfolio swaps designated as A/LM are used to manage interest rate risk tied to both assets and liabilities.
(b) Conventional A/LM floors do not have a stated receive rate or pay rate and are given a strike price on the option.
(c) Excludes accrued interest of $145 million and $543 million at December 31, 2020, and December 31, 2019, respectively.
Liquidity risk management
Liquidity risk, which is inherent in the banking industry, is measured by our ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, and fund new business opportunities at a reasonable cost, in a timely manner, and without adverse consequences. Liquidity management involves maintaining sufficient and diverse sources of funding to accommodate planned, as well as unanticipated, changes in assets and liabilities under both normal and adverse conditions.
Governance structure
We manage liquidity for all of our affiliates on an integrated basis. This approach considers the unique funding sources available to each entity, as well as each entity’s capacity to manage through adverse conditions. The approach also recognizes that adverse market conditions or other events that could negatively affect the availability or cost of liquidity will affect the access of all affiliates to sufficient wholesale funding.
The management of consolidated liquidity risk is centralized within Corporate Treasury. Oversight and governance is provided by the Board, the ERM Committee, the ALCO, and the Chief Risk Officer. The Asset Liability Management Policy provides the framework for the oversight and management of liquidity risk and is administered by the ALCO. The Corporate Treasury Oversight group within the MRM, as the second line of defense, provides additional oversight. Our current liquidity risk management practices are in compliance with the Federal Reserve Board’s Enhanced Prudential Standards.
These committees regularly review liquidity and funding summaries, liquidity trends, peer comparisons, variance analyses, liquidity projections, hypothetical funding erosion stress tests, and goal tracking reports. The reviews generate a discussion of positions, trends, and directives on liquidity risk and shape a number of our decisions. When liquidity pressure is elevated, positions are monitored more closely and reporting is more intensive. To ensure that emerging issues are identified, we also communicate with individuals inside and outside of the company on a daily basis.
Factors affecting liquidity

Our liquidity could be adversely affected by both direct and indirect events. An example of a direct event would be a downgrade in our public credit ratings by a rating agency. Examples of indirect events (events unrelated to us) that could impair our access to liquidity would be an act of terrorism or war, natural disasters, global pandemics (including COVID-19), political events, or the default or bankruptcy of a major corporation, mutual fund or hedge fund. Similarly, market speculation, or rumors about us or the banking industry in general, may adversely affect the cost and availability of normal funding sources.


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Our credit ratings at December 31, 2020, are shown in Figure 29 . We believe these credit ratings, under normal conditions in the capital markets, will enable KeyCorp or KeyBank to issue fixed income securities to investors.
Figure 29. Credit Ratings
December 31, 2020
Short-Term
Borrowings
Long-Term
Deposits (a)
Senior
Long-Term
Debt
Subordinated
Long-Term
Debt
Capital
Securities
Preferred
Stock
KEYCORP (THE PARENT COMPANY)
Standard & Poor’s
A-2 N/A BBB+ BBB BB+ BB+
Moody’s
P-2 N/A Baa1 Baa1 Baa2 Baa3
Fitch
F1 N/A A- BBB+ BB+ BB+
DBRS
R-1(low) N/A A A (low) A (low) BBB
KEYBANK
Standard & Poor’s
A-2 N/A A- BBB+ N/A N/A
Moody’s P-2 P-1/Aa3 A3 Baa1 N/A N/A
Fitch
F1 A A- BBB+ N/A N/A
DBRS
R-1(middle) A (high) A (high) A N/A N/A
(a) P-1 rating assigned by Moody’s is specific to KeyBank’s short-term bank deposit ratings.
Managing liquidity risk
Most of our liquidity risk is derived from our business model, which involves taking in deposits, many of which can be withdrawn at anytime, and lending them out in the form of illiquid loan assets. The assessments of liquidity risk are measured under the assumption of normal operating conditions as well as under a stressed environment. We manage these exposures in accordance with our risk appetite, and within Board-approved policy limits.

We regularly monitor our liquidity position and funding sources and measure our capacity to obtain funds in a variety of hypothetical scenarios in an effort to maintain an appropriate mix of available and affordable funding. In the normal course of business, we perform a monthly hypothetical funding erosion stress test for both KeyCorp and KeyBank. In a “heightened monitoring mode,” we may conduct the hypothetical funding erosion stress tests more frequently, and use assumptions to reflect the changed market environment. Our testing incorporates estimates for loan and deposit lives based on our historical studies. Erosion stress tests analyze potential liquidity scenarios under various funding constraints and time periods. Ultimately, they determine the periodic effects that major direct and indirect events would have on our access to funding markets and our ability to fund our normal operations. To compensate for the effect of these assumed liquidity pressures, we consider alternative sources of liquidity and maturities over different time periods to project how funding needs would be managed.

We maintain a Contingency Funding Plan that outlines the process for addressing a liquidity crisis. The plan provides for an evaluation of funding sources under various market conditions. It also assigns specific roles and responsibilities for managing liquidity through a problem period. As part of the plan, we maintain on-balance sheet liquid reserves referred to as our liquid asset portfolio, which consists of high quality liquid assets. During a problem period, that reserve could be used as a source of funding to provide time to develop and execute a longer-term strategy. The liquid asset portfolio at December 31, 2020, totaled $36.6 billion, consisting of $21.1 billion of unpledged securities, $66.9 million of securities available for secured funding at the FHLB, and $15.4 billion of net balances of federal funds sold and balances in our Federal Reserve account. The liquid asset portfolio can fluctuate due to excess liquidity, heightened risk, or prefunding of expected outflows, such as debt maturities. Additionally, as of December 31, 2020, our unused borrowing capacity secured by loan collateral was $22.6 billion at the Federal Reserve Bank of Cleveland and $8.4 billion at the FHLB of Cincinnati. In 2020, Key’s outstanding FHLB of Cincinnati advances increased by $0.5 billion due to an increase in borrowings.
Long-term liquidity strategy
Our long-term liquidity strategy is to be predominantly funded by core deposits. However, we may use wholesale funds to sustain an adequate liquid asset portfolio, meet daily cash demands, and allow management flexibility to execute business initiatives. Key’s client-based relationship strategy provides for a strong core deposit base that, in conjunction with intermediate and long-term wholesale funds managed to a diversified maturity structure and investor base, supports our liquidity risk management strategy. We use the loan-to-deposit ratio as a metric to monitor these strategies. Our target loan-to-deposit ratio is 90-100% (at December 31, 2020, our loan-to-deposit ratio was 76.5%), which we calculate as the sum of total loans, loans held for sale, and nonsecuritized discontinued loans divided by deposits.
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Sources of liquidity
Our primary sources of liquidity include customer deposits, wholesale funding, and liquid assets. If the cash flows needed to support operating and investing activities are not satisfied by deposit balances, we rely on wholesale funding or on-balance sheet liquid reserves. Conversely, excess cash generated by operating, investing, and deposit-gathering activities may be used to repay outstanding debt or invest in liquid assets.

Liquidity programs

We have several liquidity programs, which are described in Note 20 (“Long-Term Debt”), that are designed to enable KeyCorp and KeyBank to raise funds in the public and private debt markets. The proceeds from most of these programs can be used for general corporate purposes, including acquisitions. These liquidity programs are reviewed from time to time by the Board and are renewed and replaced as necessary. There are no restrictive financial covenants in any of these programs.

On March 10, 2020, KeyBank issued $700 million of 1.25% Senior Bank Notes due March 10, 2023. On December 16, 2020, KeyBank issued $750 million of Fixed-to-Floating Rate Senior Bank Notes due January 3, 2024, and $350 million of Floating Rate Senior Bank Notes due January 3, 2024.

Liquidity for KeyCorp

The primary source of liquidity for KeyCorp is from subsidiary dividends, primarily from KeyBank. KeyCorp has sufficient liquidity when it can service its debt; support customary corporate operations and activities (including acquisitions); support occasional guarantees of subsidiaries’ obligations in transactions with third parties at a reasonable cost, in a timely manner, and without adverse consequences; and fund capital distributions in the form of dividends and share buybacks.

We use a parent cash coverage months metric as the primary measure to assess parent company liquidity. The parent cash coverage months metric measures the number of months into the future where projected obligations can be met with the current quantity of liquidity. We generally issue term debt to supplement dividends from KeyBank to manage our liquidity position at or above our targeted levels. The parent company generally maintains cash and short-term investments in an amount sufficient to meet projected debt maturities over at least the next 24 months. At December 31, 2020, KeyCorp held $3.8 billion in cash, which we projected to be sufficient to meet our projected obligations, including the repayment of our maturing debt obligations for the periods prescribed by our risk tolerance.

Typically, KeyCorp meets its liquidity requirements through regular dividends from KeyBank, supplemented with term debt. Federal banking law limits the amount of capital distributions that a bank can make to its holding company without prior regulatory approval. A national bank’s dividend-paying capacity is affected by several factors, including net profits (as defined by statute) for the two previous calendar years and for the current year, up to the date of dividend declaration. During 2020, KeyBank paid $1.25 billion in cash dividends to KeyCorp. At January 1, 2021, KeyBank had regulatory capacity to pay $720 million in dividends to KeyCorp without prior regulatory approval.

On February 6, 2020, KeyCorp issued $800 million of 2.250% Senior Notes due April 6, 2027, under its Medium-Term Note Program.
Our liquidity position and recent activity

Over the past 12 months, our liquid asset portfolio, which includes overnight and short-term investments, as well as unencumbered, high quality liquid securities held as protection against a range of potential liquidity stress scenarios, has increased as a result of an increase in balances held at the Federal Reserve, partially offset by a decrease in unpledged securities. The liquid asset portfolio continues to exceed the amount that we estimate would be necessary to manage through an adverse liquidity event by providing sufficient time to develop and execute a longer-term solution.
From time to time, KeyCorp or KeyBank may seek to retire, repurchase, or exchange outstanding debt, capital securities, preferred shares, or Common Shares through cash purchase, privately negotiated transactions or other means. Additional information on repurchases of Common Shares by KeyCorp is included in Part II, Item 5. Market
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for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities of this report. Such transactions depend on prevailing market conditions, our liquidity and capital requirements, contractual restrictions, regulatory requirements, and other factors. The amounts involved may be material, individually or collectively.
The Consolidated Statements of Cash Flows summarize our sources and uses of cash by type of activity for the years ended December 31, 2020, and December 31, 2019.
Credit risk management
Credit risk is the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms. Like other financial services institutions, we make loans, extend credit, purchase securities, provide financial and payments products, and enter into financial derivative contracts, all of which have related credit risk.
Credit policy, approval, and evaluation
We manage credit risk exposure through a multifaceted program. The Credit Risk Committee approves management credit policies and recommends significant credit policies to the Enterprise Risk Management Committee, the KeyBank Board, and the Risk Committee of the Board for approval. These policies are communicated throughout the organization to foster a consistent approach to granting credit.
Our credit risk management team and certain individuals within our lines of business, to whom credit risk management has delegated limited credit authority, are responsible for credit approval. Individuals with assigned credit authority are authorized to grant exceptions to credit policies. It is not unusual to make exceptions to established policies when mitigating circumstances dictate, however, a corporate level tolerance has been established to keep exceptions at an acceptable level based upon portfolio and economic considerations.
Our credit risk management team uses risk models to evaluate consumer loans. These models, known as scorecards, forecast the probability of serious delinquency and default for an applicant. The scorecards are embedded in the application processing system, which allows for real-time scoring and automated decisions for many of our products. We periodically validate the loan scoring processes.
We maintain an active concentration management program to mitigate concentration risk in our credit portfolios. For individual obligors, we employ a sliding scale of exposure, known as hold limits, which is dictated by the type of loan and strength of the borrower.
Allowance for loan and lease losses
We estimate the appropriate level of the ALLL on at least a quarterly basis. The methodology used is described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan and Lease Losses.” Briefly, the ALLL estimate uses various models and estimation techniques based on our historical loss experience, current borrower characteristics, current conditions, reasonable and supportable forecasts and other relevant factors. As described in Note 1 (“Summary of Significant Accounting Policies”), on January 1, 2020, we adopted ASC 326, Financial Instruments — Credit Losses, and as such, an expected credit loss methodology, specifically current expected credit losses for the remaining life of our loans and leases, will be used to estimate the appropriate level of the ALLL. For more information, see Note 5 (“Asset Quality”).
As shown in Figure 30, our ALLL from continuing operations increased by $726 million, or 80.7%, from December 31, 2019. Our commercial ALLL decreased by $124 million, or 16.5%, with the adoption of ASU 2016-13, Financial Instruments — Credit Losses at January 1, 2020. The commercial ALLL increased by $472 million, or 75.3%, from January 1, 2020, through December 31, 2020, driven by updated economic forecasts that capture additional deterioration triggered by the global COVID-19 pandemic. Our consumer ALLL increased by $328 million, or 220.1%, with the adoption of ASU 2016-13, Financial Instruments — Credit Losses at January 1, 2020. The consumer ALLL increased $50 million, or 10.5%, from January 1, 2020, through December 31, 2020, driven by portfolio growth and updated economic forecasts that capture additional deterioration triggered by the global COVID-19 pandemic.
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Figure 30. Allocation of the Allowance for Loan and Lease Losses
2020 2019 2018
December 31,
dollars in millions
Total
Allowance
Percent of
Allowance
to Total
Allowance
Percent of
Loan Type
to Total
Loans
Total
Allowance
Percent of
Allowance
to Total
Allowance
Percent of
Loan Type
to Total
Loans
Total
Allowance
Percent of
Allowance
to Total
Allowance
Percent of
Loan Type
to Total
Loans
Commercial and industrial $ 678 41.7 % 52.3 % $ 551 61.2 % 51.0 % $ 532 60.2 % 51.1 %
Commercial real estate:
Commercial mortgage 327 20.1 12.5 143 15.9 14.3 142 16.1 15.9
Construction 47 2.9 2.0 22 2.4 1.6 33 3.8 1.9
Total commercial real estate loans 374 23.0 14.5 165 18.3 15.9 175 19.9 17.8
Commercial lease financing 47 2.9 4.3 35 3.9 5.0 36 4.1 5.1
Total commercial loans 1,099 67.6 71.1 751 83.4 71.9 743 84.2 74.0
Real estate — residential mortgage 102 6.3 9.2 7 .8 7.4 7 0.8 6.2
Home equity loans 171 10.5 9.2 31 3.5 10.9 35 3.9 12.4
Consumer direct loans 128 5.3 4.7 34 3.8 3.7 30 3.4 2.0
Credit cards 87 7.9 1.0 47 5.2 1.2 48 5.4 1.3
Consumer indirect loans 39 2.4 4.8 30 3.3 4.9 20 2.3 4.1
Total consumer loans 527 32.4 28.9 149 16.6 28.1 140 15.8 26.0
Total loans (a)
$ 1,626 100.0 % 100.0 % $ 900 100.0 % 100.0 % $ 883 100.0 % 100.0 %
2017 2016
Total
Allowance
Percent of
Allowance
to Total
Allowance
Percent of
Loan Type
to Total
Loans
Total
Allowance
Percent of
Allowance
to Total
Allowance
Percent of
Loan Type
to Total
Loans
Commercial and industrial $ 529 60.3 % 48.4 % $ 508 59.2 % 46.2 %
Commercial real estate:
Commercial mortgage 133 15.2 16.3 144 16.8 17.6
Construction 30 3.4 2.3 22 2.6 2.7
Total commercial real estate loans 163 18.6 18.6 166 19.4 20.3
Commercial lease financing 43 4.9 5.6 42 4.9 5.4
Total commercial loans 735 83.8 72.6 716 83.5 71.9
Real estate — residential mortgage 7 0.8 6.3 17 2.0 6.5
Home equity loans 43 4.9 13.9 54 6.3 14.7
Consumer direct loans 28 3.2 2.1 24 2.8 2.1
Credit cards 44 5.0 1.3 38 4.4 1.3
Consumer indirect loans 20 2.3 3.8 9 1.0 3.5
Total consumer loans 142 16.2 27.4 142 16.5 28.1
Total loans (a)
$ 877 100.0 % 100.0 % $ 858 100.0 % 100.0 %
(a) Excludes allocations of the ALLL related to the discontinued operations of the education lending business in the amount of $36 million at December 31, 2020, $10 million at December 31, 2019, $14 million at December 31, 2018, $16 million at December 31, 2017, and $24 million at December 31, 2016.

Net loan charge-offs
Figure 31 shows the trend in our net loan charge-offs by loan type, while the composition of loan charge-offs and recoveries by type of loan is presented in Figure 32.
Over the past 12 months, net loan charge-offs increased $19 million. In 2021, we expect net loan charge-offs to average loans to remain within our long-term targeted range of 40 to 60 basis points.
Figure 31. Net Loan Charge-offs from Continuing Operations
Year ended December 31,
dollars in millions 2020 2019 2018 2017 2016
Commercial and industrial $ 317 $ 292 $ 122 $ 93 $ 107
Real estate — commercial mortgage 16 6 18 9 (4)
Real estate — construction — 5 (2) 1 7
Commercial lease financing 34 21 5 8 9
Total commercial loans 367 324 143 111 119
Real estate — residential mortgage 1 1 1 (1) 3
Home equity loans 4 11 10 15 16
Consumer direct loans 30 34 29 28 22
Credit cards 31 37 37 39 31
Consumer indirect loans 10 17 14 16 14
Total consumer loans 76 100 91 97 86
Total net loan charge-offs $ 443 $ 424 $ 234 $ 208 $ 205
Net loan charge-offs to average loans .43 % .46 % .26 % .24 % .29 %
Net loan charge-offs from discontinued operations — education lending business
$ — $ 7 $ 10 $ 18 $ 17
(a) Credit amounts indicate that recoveries exceeded charge-offs.
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Figure 32. Summary of Loan and Lease Loss Experience from Continuing Operations
Year ended December 31,
dollars in millions
2020 2019 2018 2017 2016
Average loans outstanding $ 102,689 $ 91,511 $ 88,338 $ 86,365 $ 71,148
Allowance for loan and lease looses at the end of the prior period $ 900 $ 883 $ 877 $ 858 $ 796
Cumulative effect from change in accounting principle (a)
204 — — — —
Allowance for loan and lease losses at beginning of period 1,104 883 877 858 796
Loans charged off:
Commercial and industrial 351 319 159 133 118
Real estate — commercial mortgage 19 8 21 11 5
Real estate — construction — 5 — 2 9
Total commercial real estate loans (c)
19 13 21 13 14
Commercial lease financing 35 26 10 14 12
Total commercial loans (d)
405 358 190 160 144
Real estate — residential mortgage 2 3 3 3 4
Home equity loans 11 19 21 30 30
Consumer direct loans 37 41 36 34 27
Credit cards 39 44 44 44 35
Consumer indirect loans 28 34 30 31 21
Total consumer loans 117 141 134 142 117
Total loans charged off 522 499 324 302 261
Recoveries:
Commercial and industrial 34 27 37 40 11
Real estate — commercial mortgage 3 2 3 2 9
Real estate — construction — — 2 1 2
Total commercial real estate loans (c)
3 2 5 3 11
Commercial lease financing 1 5 5 6 3
Total commercial loans (d)
38 34 47 49 25
Real estate — residential mortgage 1 2 2 4 1
Home equity loans 7 8 11 15 14
Consumer direct loans 7 7 7 6 5
Credit cards 8 7 7 5 4
Consumer indirect loans 18 17 16 15 7
Total consumer loans 41 41 43 45 31
Total recoveries 79 75 90 94 56
Net loan charge-offs (443) (424) (234) (208) (205)
Provision (credit) for loan and lease losses 965 441 240 227 267
Foreign currency translation adjustment — — — — —
Allowance for loan and lease losses at end of year $ 1,626 $ 900 $ 883 $ 877 $ 858
Liability for credit losses on lending-related commitments at the end of the prior period $ 68 $ 64 $ 57 $ 55 $ 56
Liability for credit losses on contingent guarantees at the end of the prior period 7 — — — —
Cumulative effect from change in accounting principle (a)(b)
66 — — — —
Liability for credit losses on lending-related commitments at beginning of the year 141 64 57 55 56
Provision (credit) for losses on lending-related commitments 56 4 6 2 (1)
Liability for credit losses on lending-related commitments at end of the year (e)
$ 197 $ 68 $ 63 $ 57 $ 55
Total allowance for credit losses at end of the year $ 1,823 $ 968 $ 946 $ 934 $ 913
Net loan charge-offs to average total loans .43 % .46 % .26 % .24 % .29 %
Allowance for loan and lease losses to period-end loans 1.61 .95 .99 1.01 1.00
Allowance for credit losses to period-end loans 1.80 1.02 1.06 1.08 1.06
Allowance for loan and lease losses to nonperforming loans 207.1 156.0 162.9 174.4 137.3
Allowance for credit losses to nonperforming loans 232.2 167.8 174.5 185.7 146.1
Discontinued operations — education lending business:
Loans charged off $ 5 $ 12 $ 15 $ 26 $ 28
Recoveries 5 5 5 8 11
Net loan charge-offs $ — $ (7) $ (10) $ (18) $ (17)
(a) The cumulative effect from change in accounting principle relates to the January 1, 2020, adoption of ASC 2016-13.
(b) Excludes $4 million related to the provision for other financial assets.
(c) See Figure 12 and the accompanying discussion in the “Loans and loans held for sale” section for more information related to our commercial real estate loan portfolio.
(d) See Figure 11 and the accompanying discussion in the “Loans and loans held for sale” section for more information related to our commercial loan portfolio.
(e) Included in “accrued expense and other liabilities” on the balance sheet.

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Nonperforming assets

Figure 33 shows the composition of our nonperforming assets. As shown in Figure 33, nonperforming assets increased $222 million during 2020. The increase was in part driven by pandemic impacts on our consumer related mortgages, commercial and industrial exposures, and modest increases in real estate commercial mortgages. NPAs were also impacted by the addition of a single large oil and gas property into OREO. See Note 1 (“Summary of Significant Accounting Policies”) under the headings “Nonperforming Loans,” “Impaired Loans,” and “Allowance for Loan and Lease Losses” for a summary of our nonaccrual and charge-off policies.
Figure 33. Summary of Nonperforming Assets and Past Due Loans from Continuing Operations
December 31,
dollars in millions 2020 2019 2018 2017 2016
Commercial and industrial $ 385 $ 264 $ 152 $ 153 $ 297
Real estate — commercial mortgage 104 83 81 30 26
Real estate — construction — 2 2 2 3
Total commercial real estate loans (a)
104 85 83 32 29
Commercial lease financing 8 6 9 6 8
Total commercial loans (b)
497 355 244 191 334
Real estate — residential mortgage 110 48 62 58 56
Home equity loans 154 145 210 229 223
Consumer direct loans 5 4 4 4 6
Credit cards 2 3 2 2 2
Consumer indirect loans 17 22 20 19 4
Total consumer loans 288 222 298 312 291
Total nonperforming loans 785 577 542 503 625
Nonperforming loans held for sale 49 94 — — —
OREO 100 35 35 31 51
Other nonperforming assets 3 9 — — —
Total nonperforming assets $ 937 $ 715 $ 577 $ 534 $ 676
Accruing loans past due 90 days or more $ 86 $ 101 $ 112 $ 89 $ 87
Accruing loans past due 30 through 89 days 241 389 312 359 404
Restructured loans — accruing and nonaccruing (c)
363 347 399 317 280
Restructured loans included in nonperforming loans (c)
229 183 247 189 141
Nonperforming assets from discontinued operations — education lending business 5 7 8 7 5
Nonperforming loans to period-end portfolio loans .78 % .61 % .61 % .58 % .73 %
Nonperforming assets to period-end portfolio loans plus OREO and other nonperforming assets (c)
.92 .75 .64 .62 .79
(a) See Figure 12 and the accompanying discussion in the “Loans and loans held for sale” section for more information related to our commercial real estate loan portfolio.
(b) See Figure 11 and the accompanying discussion in the “Loans and loans held for sale” section for more information related to our commercial loan portfolio.
(c) Restructured loans (i.e., TDRs) are those for which Key, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. See Note 5,(“Asset Quality“) for more information on our TDRs.
Figure 34 shows the types of activity that caused the change in our nonperforming loans during each of the last four quarters and the years ended December 31, 2020, and December 31, 2019.
Figure 34. Summary of Changes in Nonperforming Loans from Continuing Operations
2020 Quarters
in millions 2020 Fourth Third Second First 2019
Balance at beginning of period $ 577 $ 834 $ 760 $ 632 $ 577 $ 542
Loans placed on nonaccrual status (a)
1,199 300 387 293 219 924
Charge-offs (521) (160) (150) (111) (100) (380)
Loans sold (24) (9) (6) (5) (4) (57)
Payments (226) (83) (83) (29) (31) (141)
Transfers to OREO (6) (3) — — (3) (19)
Transfers to nonperforming loans held for sale — — — — — (125)
Transfers to other nonperforming assets — — — — — (13)
Loans returned to accrual status (214) (94) (74) (20) (26) (154)
Balance at end of period $ 785 $ 785 $ 834 $ 760 $ 632 $ 577
(a) PCI loans meeting nonperforming criteria were historically excluded from Key's nonperforming disclosures. As a result of CECL implementation on January 1, 2020, PCI loans became PCD loans. PCD loans that met the definition of nonperforming are now included in nonperforming disclosures, resulting in a $45 million increase in nonperforming loans in the first quarter of 2020.

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Operational and compliance risk management

Like all businesses, we are subject to operational risk, which is the risk of loss resulting from human error or malfeasance, inadequate or failed internal processes and systems, and external events. These events include, among other things, threats to our cybersecurity, as we are reliant upon information systems and the Internet to conduct our business activities. Operational risk also encompasses compliance risk, which is the risk of loss from violations of, or noncompliance with, laws, rules and regulations, prescribed practices, and ethical standards. Under the Dodd-Frank Act, large financial companies like Key are subject to heightened prudential standards and regulation. This heightened level of regulation has increased our operational risk. Resulting operational risk losses and/or additional regulatory compliance costs could take the form of explicit charges, increased operational costs, harm to our reputation, or foregone opportunities.

We seek to mitigate operational risk through identification and measurement of risk, alignment of business strategies with risk appetite and tolerance, and a system of internal controls and reporting. We continuously strive to strengthen our system of internal controls to improve the oversight of our operational risk and to ensure compliance with laws, rules, and regulations. For example, an operational event database tracks the amounts and sources of operational risk and losses. This tracking mechanism helps to identify weaknesses and to highlight the need to take corrective action. We also rely upon software programs designed to assist in assessing operational risk and monitoring our control processes. This technology has enhanced the reporting of the effectiveness of our controls to senior management and the Board.

The Operational Risk Management Program provides the framework for the structure, governance, roles, and responsibilities, as well as the content, to manage operational risk for Key. The Compliance Risk Committee serves the same function in managing compliance risk for Key. The Operational Risk Committee supports the ERM Committee by identifying early warning events and trends, escalating emerging risks, and discussing forward-looking assessments. The Operational Risk Committee includes attendees from each of the Three Lines of Defense. Primary responsibility for managing and monitoring internal control mechanisms lies with the managers of our various lines of business. The Operational Risk Committee and Compliance Risk Committee are senior management committees that oversee our level of operational and compliance risk and direct and support our operational and compliance infrastructure and related activities. These committees and the Operational Risk Management and Compliance functions are an integral part of our ERM Program. Our Risk Review function regularly assesses the overall effectiveness of our Operational Risk Management and Compliance Programs and our system of internal controls. Risk Review reports the results of reviews on internal controls and systems to senior management and the Risk and Audit Committees and independently supports the Risk Committee’s oversight of these controls.

Cybersecurity

We maintain comprehensive Cyber Incident Response Plans, and we devote significant time and resources to maintaining and regularly updating our technology systems and processes to protect the security of our computer systems, software, networks, and other technology assets against attempts by third parties to obtain unauthorized access to confidential information, destroy data, disrupt or degrade service, sabotage systems, or cause other damage. We and many other U.S. financial institutions have experienced distributed denial-of-service attacks from technologically sophisticated third parties. These attacks are intended to disrupt or disable online banking services and prevent banking transactions. We also periodically experience other attempts to breach the security of our systems and data. These cyberattacks have not, to date, resulted in any material disruption of our operations or material harm to our customers, and have not had a material adverse effect on our results of operations.

Cyberattack risks may also occur with our third-party technology service providers, and may result in financial loss or liability that could adversely affect our financial condition or results of operations. Cyberattacks could also interfere with third-party providers’ ability to fulfill their contractual obligations to us. High-profile cyberattacks have targeted retailers, credit bureaus, and other businesses for the purpose of acquiring the confidential information (including personal, financial, and credit card information) of customers, some of whom are customers of ours. We may incur expenses related to the investigation of such attacks or related to the protection of our customers from identity theft as a result of such attacks. In 2020, many companies and U.S. government organizations were victims of a sophisticated and targeted supply chain attack on the SolarWinds Orion software. While Key does not utilize the SolarWinds software products, some of our vendors do. We may incur expenses to enhance our systems or processes to protect against cyber or other security incidents. Risks and exposures related to cyberattacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these
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threats, as well as due to the expanding use of Internet banking, mobile banking, and other technology-based products and services by us and our clients. See the risk factor entitled “Our information systems may experience an interruption or breach in security” in Part 1, Item 1A. Risk Factors for additional information on risks related to information security.

As described in more detail in “Risk Management — Overview” in Item 7 of this report, the Board serves in an oversight capacity ensuring that Key’s risks are managed in a manner that is effective and balanced and adds value for the shareholders. The Board’s Risk Committee has primary oversight for enterprise-wide risk at KeyCorp, including operational risk (which includes cybersecurity). The Risk Committee reviews and provides oversight of management’s activities related to the enterprise-wide risk management framework, including cyber-related risk. Board members are updated on cybersecurity matters at each regularly-scheduled Board meeting. The ERM Committee, chaired by the Chief Executive Officer and comprising other senior level executives, is responsible for managing risk (including cyber-related risk) and ensuring that the corporate risk profile is managed in a manner consistent with our risk appetite. The ERM Committee reports to the Board’s Risk Committee.

GAAP to Non-GAAP Reconciliations

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not
audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company,
they have limitations as analytical tools, and should not be considered in isolation, nor as a substitute for analyses
of results as reported under GAAP.

The tangible common equity ratio and the return on tangible common equity ratio have been a focus for some investors, and management believes that these ratios may assist investors in analyzing Key’s capital position without regard to the effects of intangible assets and preferred stock. Since analysts and banking regulators may assess our capital adequacy using tangible common equity, we believe it is useful to enable investors to assess our capital adequacy on these same bases.
Year ended December 31,
dollars in millions
2020 2019 2018 2017 2016
Tangible common equity to tangible assets at period end
Key shareholders’ equity (GAAP) $ 17,981 $ 17,038 $ 15,595 $ 15,023 $ 15,240
Less:
Intangible assets (a)
2,848 2,910 2,818 2,928 2,788
Preferred Stock (b)
1,856 1,856 1,421 1,009 1,640
Tangible common equity (non-GAAP) $ 13,277 $ 12,272 $ 11,356 $ 11,086 $ 10,812
Total assets (GAAP) $ 170,336 $ 144,988 $ 139,613 $ 137,698 $ 136,453
Less:
Intangible assets (a)
2,848 2,910 2,818 2,928 2,788
Tangible assets (non-GAAP) $ 167,488 $ 142,078 $ 136,795 $ 134,770 $ 133,665
Tangible common equity to tangible assets ratio (non-GAAP) 7.93 % 8.64 % 8.30 % 8.23 % 8.09 %
Average tangible common equity
Average Key shareholders’ equity (GAAP) $ 17,636 $ 16,636 $ 15,131 $ 15,224 $ 12,647
Less:
Intangible assets (average) (c)
2,878 2,909 2,869 2,837 1,825
Preferred Stock (average) 1,900 1,755 1,205 1,137 627
Average tangible common equity (non-GAAP) $ 12,858 $ 11,972 $ 11,057 $ 11,250 $ 10,195
Return on average tangible common equity from continuing operations
Income (loss) from continuing operations attributable to Key common shareholders (GAAP)
$ 1,223 $ 1,611 $ 1,793 $ 1,219 $ 753
Average tangible common equity (non-GAAP) $ 12,858 $ 11,972 $ 11,057 $ 11,250 $ 10,195
Return on average tangible common equity from continuing operations (non-GAAP)
9.51 % 13.46 % 16.22 % 10.84 % 7.39 %
Return on average tangible common equity consolidated
Net income (loss) attributable to Key common shareholders (GAAP) $ 1,237 $ 1,620 $ 1,800 $ 1,226 $ 754
Average tangible common equity (non-GAAP) 12,858 11,972 11,057 11,250 10,195
Return on average tangible common equity consolidated (non-GAAP) 9.62 % 13.53 % 16.28 % 10.90 % 7.40
(a) For the years ended December 31, 2020, December 31, 2019, December 31, 2018, December 31, 2017, and December 31, 2016, intangible assets exclude $4 million, $7 million, $14 million, $26 million, and $42 million,, respectively, of period-end purchased credit card relationships.
(b) Net of capital surplus.
(c) For the years ended December 31, 2020, December 31, 2019, December 31, 2018, December 31, 2017, and December 31, 2016, average intangible assets exclude $6 million, $10 million, $20 million, $34 million, and $43 million, respectively, of average purchased credit card relationships.






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The cash efficiency ratio is a ratio of two non-GAAP performance measures. Accordingly, there is no directly
comparable GAAP performance measure. The cash efficiency ratio excludes the impact of our intangible asset
amortization from the calculation. We believe this ratio provides greater consistency and comparability between our results and those of our peer banks. Additionally, this ratio is used by analysts and investors to evaluate how effectively management is controlling noninterest expenses in generating revenue, as they develop earnings forecasts and peer bank analysis.
Year ended December 31,
dollars in millions
2020 2019 2018 2017 2016
Cash efficiency ratio
Noninterest expense (GAAP) $ 4,109 $ 3,901 $ 3,975 $ 4,098 $ 3,756
Less: Intangible asset amortization (GAAP) 65 89 99 95 55
Adjusted noninterest expense (non-GAAP) $ 4,044 $ 3,812 $ 3,876 $ 4,003 $ 3,701
Net interest income (GAAP) $ 4,034 $ 3,909 $ 3,909 $ 3,777 $ 2,919
Plus: TE adjustment 29 32 31 53 34
Noninterest income (GAAP) 2,652 2,459 2,515 2,478 2,071
Total TE revenue (non-GAAP) $ 6,715 $ 6,400 $ 6,455 $ 6,308 $ 5,024
Cash efficiency ratio (non-GAAP) 60.2 % 59.6 % 60.0 % 63.5 % 73.7 %

Fourth Quarter Results
Figure 35 shows our financial performance for each of the past eight quarters. Highlights of our results for the fourth quarter of 2020 are summarized below.
Earnings
Our fourth quarter net income from continuing operations attributable to Key common shareholders was $549 million, or $.56 per diluted Common Share, compared to $439 million, or $.45 per diluted Common Share, for the fourth quarter of 2019.
On an annualized basis, our return on average total assets from continuing operations for the fourth quarter of 2020 was 1.35%, compared to 1.27% for the fourth quarter of 2019. The annualized return on average tangible common equity from continuing operations was 16.61% for the fourth quarter of 2020, compared to 14.09% for the year-ago quarter.

Net interest income

TE net interest income was $1.0 billion for the fourth quarter of 2020, compared to TE net interest income of $987 million for the fourth quarter of 2019. The increase in net interest income reflects higher earning asset balances and loan fees, partially offset by a lower net interest margin. The net interest margin was impacted by lower interest rates and a change in balance sheet mix, including elevated levels of liquidity and Key's participation in the PPP.

Noninterest income

Our noninterest income was $802 million for the fourth quarter of 2020, compared to $651 million for the year-ago quarter. Noninterest income increased by $151 million, primarily driven by a $62 million increase in investment banking and debt placement fees. The record fourth quarter of 2020 for investment banking and debt placement fees was largely related to strong M&A activity. Cards and payments income increased $30 million from the year-ago period, driven by higher prepaid card activity. Additionally, investments made in Key's mortgage business continue to drive consumer mortgage income and commercial mortgage servicing fees, which increased $22 million and $13 million, respectively, from the year-ago quarter.

Noninterest expense

Our noninterest expense was $1.1 billion for the fourth quarter of 2020, compared to $980 million for the fourth quarter of 2019. The increase is primarily related to higher personnel costs of $110 million, reflecting higher production-related incentives and higher salaries due to merit increases. Other drivers for the year-over-year increases include payments-related expenses from prepaid card activity incurred in the current period, as well as COVID-19-related costs related to steps that the company has taken to ensure the health and safety of teammates.
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Provision for credit losses

Our provision for credit losses was $20 million for the fourth quarter of 2020, compared to $109 million for the fourth quarter of 2019. The provision for credit losses reflects the adoption of the CECL accounting standard on January 1, 2020. This framework requires that management estimate credit losses over the full remaining expected life and consider expected future changes in macroeconomic conditions. Our ALLL was $1.6 billion, or 1.61% of total period-end loans, at December 31, 2020, compared to .95% at December 31, 2019.

Net loan charge-offs for the fourth quarter of 2020 totaled $135 million, or .53% of average total loans. These results compare to $99 million, or .42%, for the fourth quarter of 2019. The allowance for credit losses was $1.8 billion, or 1.80% of total period-end loans at December 31, 2020, compared to 1.02% at December 31, 2019.

At December 31, 2020, Key’s nonperforming loans totaled $785 million, which represented .78% of period-end portfolio loans. These results compare to .61% at December 31, 2019. Nonperforming assets at December 31, 2020, totaled $937 million, and represented .92% of period-end portfolio loans and OREO and other nonperforming assets compared to .75% at December 31, 2019.

Income taxes

For the fourth quarter of 2020, we recorded a tax provision from continuing operations of $114 million, compared to a tax provision of $75 million for the fourth quarter of 2019. The fourth quarter of 2019 included a tax benefit o f $11 million related to the reversal of a valuation allowance against federal and state capital loss carryforwards acquired from First Niagara Financial Group utilized in the quarter. The effective tax rate for the fourth quarter of 2020 was 16.5%, compared to 14.0% for the same quarter one year ago.

Our federal tax expense and effective tax rate differ from the amount that would be calculated using the federal statutory tax rate; primarily from investments in tax-advantaged assets, such as corporate-owned life insurance, tax credits associated with investments in low-income housing projects and energy related projects, and periodic adjustments to our tax reserves as described in Note 14 (“Income Taxes”).
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Figure 35. Selected Quarterly Financial Data
2020 Quarters 2019 Quarters
dollars in millions, except per share amounts
Fourth
Third
Second
First
Fourth
Third
Second
First
FOR THE PERIOD
Interest income $ 1,125 $ 1,119 $ 1,190 $ 1,251 $ 1,285 $ 1,317 $ 1,329 $ 1,304
Interest expense 90 119 172 270 306 345 348 327
Net interest income 1,035 1,000 1,018 981 979 972 981 977
Provision for credit losses 20 160 482 359 109 200 74 62
Noninterest income 802 681 692 477 651 650 622 536
Noninterest expense 1,128 1,037 1,013 931 980 939 1,019 963
Income (loss) from continuing operations before income taxes 689 484 215 168 541 483 510 488
Income (loss) from continuing operations attributable to Key 575 424 185 145 466 413 423 406
Income (loss) from discontinued operations, net of taxes 7 4 2 1 3 3 2 1
Net income (loss) attributable to Key 582 428 187 146 469 416 425 407
Income (loss) from continuing operations attributable to Key common shareholders
549 397 159 118 439 383 403 386
Income (loss) from discontinued operations, net of taxes 7 4 2 1 3 3 2 1
Net income (loss) attributable to Key common shareholders 556 401 161 119 442 386 405 387
PER COMMON SHARE
Income (loss) from continuing operations attributable to Key common shareholders
$ .57 $ .41 $ .16 $ .12 $ .45 $ .39 $ .40 $ .38
Income (loss) from discontinued operations, net of taxes .01 — — — — — — —
Net income (loss) attributable to Key common shareholders (a)
.57 .41 .17 .12 .45 .39 .40 .38
Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution
.56 .41 .16 .12 .45 .38 .40 .38
Income (loss) from discontinued operations, net of taxes — assuming dilution
.01 — — — — — — —
Net income (loss) attributable to Key common shareholders — assuming dilution (a)
.57 .41 .17 .12 .45 .39 .40 .38
Cash dividends paid .185 .185 .185 .185 .185 .185 .170 .170
Book value at period end 16.53 16.25 16.07 15.95 15.54 15.44 15.07 14.31
Tangible book value at period end 13.61 13.32 13.12 12.98 12.56 12.48 12.12 11.55
Weighted-average Common Shares outstanding (000) 967,987 967,804 967,147 967,446 973,450 988,319 999,163 1,006,717
Weighted-average Common Shares and potential Common Shares outstanding (000) (b)
976,460 973,988 972,141 976,110 984,361 998,328 1,007,964 1,016,504
AT PERIOD END
Loans $ 101,185 $ 103,081 $ 106,159 $ 103,198 $ 94,646 $ 92,760 $ 91,937 $ 90,178
Earning assets 155,469 155,585 156,177 141,333 130,807 132,160 130,213 127,296
Total assets 170,336 170,540 171,192 156,197 144,988 146,691 144,545 141,515
Deposits 135,282 136,746 135,513 115,304 111,870 111,649 109,946 108,175
Long-term debt 13,709 12,685 13,734 13,732 12,448 14,470 14,312 14,168
Key common shareholders’ equity 16,081 15,822 15,642 15,511 15,138 15,216 15,069 14,474
Key shareholders’ equity 17,981 17,722 17,542 17,411 17,038 17,116 16,969 15,924
PERFORMANCE RATIOS — FROM CONTINUING OPERATIONS
Return on average total assets 1.35 % 1.00 % .45 % .40 % 1.27 % 1.14 % 1.19 % 1.18 %
Return on average common equity 13.65 9.98 4.05 3.10 11.40 9.99 10.94 10.98
Return on average tangible common equity (c)
16.61 12.19 4.96 3.82 14.09 12.38 13.69 13.69
Net interest margin (TE) 2.70 2.62 2.76 3.01 2.98 3.00 3.06 3.13
Cash efficiency ratio (c)
60.3 60.6 57.9 62.3 58.7 56.0 61.9 61.9
PERFORMANCE RATIOS — FROM CONSOLIDATED OPERATIONS
Return on average total assets 1.36 % 1.00 % .46 % .40 % 1.27 % 1.14 % 1.19 % 1.17 %
Return on average common equity 13.82 10.08 4.10 3.12 11.48 10.07 11.00 11.01
Return on average tangible common equity (c)
16.82 12.31 5.02 3.86 14.19 12.48 13.75 13.72
Net interest margin (TE) 2.69 2.62 2.76 3.00 2.97 2.98 3.05 3.12
Loan to deposit (d)
76.5 77.2 80.4 80.4 86.6 85.3 86.1 85.1
CAPITAL RATIOS AT PERIOD END
Key shareholders’ equity to assets 10.56 % 10.39 % 10.25 % 11.15 % 11.75 % 11.67 % 11.74 % 11.25 %
Key common shareholders’ equity to assets 9.47 9.30 9.16 9.96 10.47 10.40 10.46 10.25
Tangible common equity to tangible assets (c)
7.93 7.76 7.61 8.26 8.64 8.58 8.59 8.43
Common Equity Tier 1 9.73 9.47 9.09 8.87 9.44 9.48 9.57 9.81
Tier 1 risk-based capital 11.11 10.86 10.45 10.21 10.86 10.91 11.01 10.94
Total risk-based capital 13.40 13.26 12.80 12.22 12.79 12.90 13.03 12.98
Leverage 8.94 8.72 8.80 9.78 9.88 9.93 10.00 9.89
TRUST ASSETS
Assets under management $ 44,140 $ 41,312 $ 39,722 $ 36,189 $ 40,833 $ 39,416 $ 38,942 $ 38,742
OTHER DATA
Average full-time-equivalent employees 17,029 17,097 16,646 16,529 16,537 16,898 17,206 17,554
Branches 1,073 1,077 1,077 1,082 1,098 1,101 1,102 1,158
(a) EPS may not foot due to rounding.
(b) Assumes conversion of Common Share options and other stock awards and/or convertible preferred stock, as applicable.
(c) See Figure 36 entitled “Selected Quarterly GAAP to Non-GAAP Reconciliations,” which presents the computations of certain financial measures related to “tangible common equity,” and “cash efficiency.” The table reconciles the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons.
(d) Represents period-end consolidated total loans and loans held for sale divided by period-end consolidated total deposits.

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Figure 36. Selected Quarterly GAAP to Non-GAAP Reconciliations
2020 Quarters 2019 Quarters
dollars in millions
Fourth
Third
Second
First
Fourth
Third
Second
First
Tangible common equity to tangible assets at period end
Key shareholders’ equity (GAAP) $ 17,981 $ 17,722 $ 17,542 $ 17,411 $ 17,038 $ 17,116 $ 16,969 $ 15,924
Less:
Intangible assets (a)
2,848 2,862 2,877 2,894 2,910 2,928 2,952 2,804
Preferred Stock (b)
1,856 1,856 1,856 1,856 1,856 1,856 1,856 1,421
Tangible common equity (non-GAAP) $ 13,277 $ 13,004 $ 12,809 $ 12,661 $ 12,272 $ 12,332 $ 12,161 $ 11,699
Total assets (GAAP) $ 170,336 $ 170,540 $ 171,192 $ 156,197 $ 144,988 $ 146,691 $ 144,545 $ 141,515
Less:
Intangible assets (a)
2,848 2,862 2,877 2,894 2,910 2,928 2,952 2,804
Tangible assets (non-GAAP) $ 167,488 $ 167,678 $ 168,315 $ 153,303 $ 142,078 $ 143,763 $ 141,593 $ 138,711
Tangible common equity to tangible assets ratio (non-GAAP) 7.93 % 7.76 % 7.61 % 8.26 % 8.64 % 8.58 % 8.59 % 8.43 %
Average tangible common equity
Average Key shareholders’ equity (GAAP) $ 17,905 $ 17,730 $ 17,688 $ 17,216 $ 17,178 $ 17,113 $ 16,531 $ 15,702
Less:
Intangible assets (average) (c)
2,855 2,870 2,886 2,902 2,919 2,942 2,959 2,813
Preferred Stock (average) 1,900 1,900 1,900 1,900 1,900 1,900 1,762 1,450
Average tangible common equity (non-GAAP) $ 13,150 $ 12,960 $ 12,902 $ 12,414 $ 12,359 $ 12,271 $ 11,810 $ 11,439
Return on average tangible common equity from continuing operations
Net income (loss) from continuing operations attributable to Key common shareholders (GAAP)
$ 549 $ 397 $ 159 $ 118 $ 439 $ 383 $ 403 $ 386
Average tangible common equity (non-GAAP) 13,150 12,960 12,902 12,414 12,359 12,271 11,810 11,439
Return on average tangible common equity from continuing operations (non-GAAP)
16.61 % 12.19 % 4.96 % 3.82 % 14.09 % 12.38 % 13.69 % 13.69 %
Return on average tangible common equity consolidated
Net income (loss) attributable to Key common shareholders (GAAP) $ 556 $ 401 $ 161 $ 119 $ 442 $ 386 $ 405 $ 387
Average tangible common equity (non-GAAP) 13,150 12,960 12,902 12,414 12,359 12,271 11,810 11,439
Return on average tangible common equity consolidated (non-GAAP) 16.82 % 12.31 % 5.02 % 3.86 % 14.19 % 14.19 % 14.19 % 14.19 %
Cash efficiency ratio
Noninterest expense (GAAP) $ 1,128 $ 1,037 $ 1,013 $ 931 $ 980 $ 939 $ 1,019 $ 963
Less: Intangible asset amortization (GAAP) 15 15 18 17 19 26 22 22
Adjusted noninterest expense (non-GAAP) $ 1,113 $ 1,022 $ 995 $ 914 $ 961 $ 913 $ 997 $ 941
Net interest income (GAAP) $ 1,035 $ 1,000 $ 1,018 $ 981 $ 979 $ 972 $ 981 $ 977
Plus: TE adjustment 8 6 7 8 8 8 8 8
Noninterest income (GAAP) 802 681 692 477 651 650 622 536
Total TE revenue (non-GAAP) $ 1,845 $ 1,687 $ 1,717 $ 1,466 $ 1,638 $ 1,630 $ 1,611 $ 1,521
Cash efficiency ratio (non-GAAP) 60.3 % 60.6 % 57.9 % 62.3 % 58.7 % 56.0 % 61.9 % 61.9 %
(a) For the three months ended December 31, 2020, September 30, 2020, June 30, 2020, and March 31, 2020, intangible assets exclude $4 million, $5 million, $5 million, and $6 million, respectively, of period-end purchased credit card relationships. For the three months ended December 31, 2019, September 30, 2019, June 30, 2019, and March 31, 2019, intangible assets exclude $7 million, $9 million, $10 million, and $12 million, respectively, of period-end purchased credit card relationships.
(b) Net of capital surplus.
(c) For the three months ended December 31, 2020, September 30, 2020, June 30, 2020, and March 31, 2020, average intangible assets exclude $5 million, $5 million, $6 million, and $7 million, respectively, of average purchased credit card relationships. For the three months ended December 31, 2019, September 30, 2019, June 30, 2019, and March 31, 2019, average intangible assets exclude $8 million, $9 million, $11 million, and $13 million, respectively, of average purchased credit card relationships.

Critical Accounting Policies and Estimates
Our business is dynamic and complex. Consequently, we must exercise judgment in choosing and applying accounting policies and methodologies. These choices are critical; not only are they necessary to comply with GAAP, they also reflect our view of the appropriate way to record and report our overall financial performance. All accounting policies are important, and all policies described in Note 1 (“Summary of Significant Accounting Policies”) should be reviewed for a greater understanding of how we record and report our financial performance.
In our opinion, some accounting policies are more likely than others to have a critical effect on our financial results and to expose those results to potentially greater volatility. These policies apply to areas of relatively greater business importance, or require us to exercise judgment and to make assumptions and estimates that affect amounts reported in the financial statements. Because these assumptions and estimates are based on current circumstances, they may prove to be inaccurate, or we may find it necessary to change them. The following is a description of our current critical accounting policies.
In conjunction with the adoption of ASC 326 on January 1, 2020, the critical accounting policy and estimate disclosure for our ALLL was updated. The accounting policy for goodwill was also updated due to the adoption of ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.”



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Allowance for loan and lease losses
The allowance for loan and lease losses represents management’s estimate of all expected credit losses over the expected contractual life of our existing loan portfolio. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. These critical estimates include significant use of our own historical data and complex methods to interpret them. We have an ongoing process to evaluate and enhance the quality, quantity, and timeliness of our data and interpretation methods used in the determination of these allowances. These evaluations are inherently subjective, as they require material estimates and may be susceptible to significant change, and include, among others:

• PD,
• LGD,
• Outstanding balance of the loan,
• Movement through delinquency stages,
• Amounts and timing of expected future cash flows,
• Value of collateral, which may be obtained from third parties,
• Economic forecasts which are obtained from a third party provider, and
• Qualitative factors, such as changes in current economic conditions, that may not be reflected in modeled
results.

As described in our accounting policy related to the ALLL in Note 1 (“Basis of Presentation and Accounting Policies”) of this report under the heading “Allowance for Loan and Lease Losses," we employ a disciplined process and methodology to establish our ALLL, which has three main components: (i) asset specific / individual loan reserves; (ii) quantitative (formulaic or pooled) reserves; and (iii) qualitative (judgmental) reserves.

We use a non-DCF factor-based approach to estimate expected credit losses that include component PD/LGD/EAD models as well as less complex estimation methods for smaller loan portfolios. Probability of default models estimate the likelihood a borrower will cease making payments as agreed. These models use observed loan-level information and projected paths of macroeconomic variables. Borrower credit attributes including FICO scores of consumers and internally assigned risk ratings for commercial borrowers are significant inputs to the models. Consumer FICO scores are refreshed quarterly and commercial risk ratings are updated annually with select borrowers updated more frequently. The macroeconomic trends that have a significant impact on the probability of default vary by portfolio segment. Exposure at default models estimate the loan balance at the time the borrower stops making payments. We use an amortization based formulaic approach to estimate account level EAD for all
term loans. We use portfolio specific methods in each of our revolving product portfolios. LGD models estimate the loss we will suffer once a loan is in default. Account level inputs to LGD models include collateral attributes, such as loan to value.

If we observe limitations in the data or models, we use model overlays to make adjustments to model outputs to capture a particular risk or compensate for a known limitation. These variables and others may result in actual loan losses that differ from the originally estimated amounts.

This estimate produced by our models is forward-looking and requires management to use forecasts about future economic conditions to determine the expected credit loss over the remaining life of an instrument. Moody’s Consensus forecast is the source of macroeconomic projections, including the interest rate forecasts used in the credit models. We use a two year reasonable and supportable period across all products to forecast economic conditions. As the length of the life of a financial asset increases, these inputs may become impractical to estimate as reasonable and supportable. We believe the two year time horizon appropriately aligns with our business planning, available industry guidance, and reliability of various forecasting services. Following this two year period in which supportable forecasts can be generated, for all modeled loan portfolios, we revert expected credit losses to a level that is consistent with our historical information by reverting the macroeconomic variables (model inputs) to their long run average. We revert to historical loss rates for less complex estimation methods for smaller portfolios.
A four quarter reversion period is used where the macroeconomic variables linearly revert to their long run average following the two year reasonable and supportable period. We use a 20 year lookback period for determining long run historical average of the macroeconomic variables. We determined the 20 year lookback period is appropriate as it captures the previous two economic cycles including the last downturn and our more recent positive credit experience.

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The ALLL is sensitive to various macroeconomic drivers such as GDP and unemployment as well as portfolio attributes such as remaining term, outstanding balance, risk ratings, FICO, LTV, and delinquency status. Our ALLL models were designed to capture the correlation between economic and portfolio changes. As such, evaluating shifts in individual portfolio attributes and macroeconomic variables in isolation may not be indicative of past or future performance.

It is difficult to estimate how potential changes in any one factor or input might affect the overall ALLL because we consider a wide variety of factors and inputs in estimating the ALLL. Changes in the factors and inputs considered may not occur at the same rate and may not be consistent across all geographies or product types, and changes in factors and input may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. However, to consider the impact of a hypothetical alternate economic forecast, we compared the modeled quantitative allowance results using a downside economic scenario. The maximum difference in the quarterly macroeconomic variables between the base and downside scenarios over the two year reasonable and supportable period includes an approximate 8% decline in GDP annualized growth and an approximate 4% increase in the U.S. unemployment rate. The difference between these two scenarios would have driven an increase of approximately 1.9x for commercial and 1.4x for the consumer modeled allowance results.

Similarly, deteriorating conditions for portfolio factors were also considered by moderately stressing key portfolio drivers, relative to the baseline portfolio conditions. Stressing risk ratings by two grades for commercial loans generates a 1.3x increase in the commercial modeled allowance results. Stressing FICO by ten points, and LTV and utilization by 10% for consumer loans generates a 1.2x increase in the consumer modeled allowance results.

Note that these analyses demonstrate the sensitivity of the ALLL to key quantitative assumptions; however, they are not intended to estimate changes in the overall ALLL as they do not reflect qualitative factors related to idiosyncratic risk factors, changes in current economic conditions that may not be reflected in quantitatively derived results, and other relevant factors that must be considered to ensure the ALLL reflects our best estimate of current expected credit losses. With the unprecedented economic uncertainty caused by the COVID-19 pandemic, future ALLL results may vary considerably based on the actual magnitude of the pandemic and impact of the United States' monetary and fiscal response.
Valuation methodologies
Fair value measurements

We measure or monitor many of our assets and liabilities on a fair value basis. Fair value is generally defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) as opposed to the price that would be paid to acquire the asset or received to assume the liability (an entry price), in an orderly transaction between market participants at the measurement date under current market conditions. While management uses judgment when determining the price at which willing market participants would transact when there has been a significant decrease in the volume or level of activity for the asset or liability in relation to “normal” market activity, management’s objective is to determine the point within the range of fair value estimates that is most representative of a sale to a third-party investor under current market conditions. The value to us if the asset or liability were held to maturity is not included in the fair value estimates.

A fair value measure should reflect the assumptions that market participants would use in pricing the asset or liability, including the assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. Fair value is measured based on a variety of inputs. Fair value may be based on quoted market prices for identical assets or liabilities traded in active markets (Level 1 valuations). If market prices are not available, quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-based valuation techniques for which all significant assumptions are observable in the market are used (Level 2 valuations). Where observable market data is not available, the valuation is generated from model based techniques that use significant assumptions not observable in the market, but observable based on our specific data (Level 3 valuations). Unobservable assumptions reflect our estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability.

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The selection and weighting of the various fair value techniques may result in a fair value higher or lower than carrying value. Considerable judgment may be involved in determining the amount that is most representative of fair value.

For assets and liabilities recorded at fair value, our policy is to maximize the use of observable inputs
and minimize the use of unobservable inputs when developing fair value measurements for those items where there
is an active market. In certain cases, when market observable inputs for model-based valuation techniques may not
be readily available, we are required to make judgments about assumptions market participants would use
in estimating the fair value of the financial instrument. The models used to determine fair value adjustments are
regularly evaluated by management for relevance under current facts and circumstances.

Changes in market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. When market data is not available, we use valuation techniques requiring more management judgment to estimate the appropriate fair value.

Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary measure of
accounting. Fair value is used on a nonrecurring basis to measure certain assets or liabilities (including held-to-maturity securities, commercial loans held for sale, and OREO) for impairment or for disclosure purposes in accordance with current accounting guidance.

Impairment analysis also relates to long-lived assets and core deposit and other intangible assets. An
impairment loss is recognized if the carrying amount of the asset is not likely to be recoverable and exceeds its fair
value. In determining the fair value, management uses models and applies the techniques and assumptions
previously discussed.
See Note 1 under the heading “Fair Value Measurements” and Note 6 (“Fair Value Measurements”) for a detailed discussion of determining fair value, including pricing validation processes.
Goodwill

The valuation and testing methodologies used in our analysis of goodwill impairment are summarized in Note 1
under the heading “Goodwill and Other Intangible Assets.” Goodwill is initially recorded as the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill is tested for impairment for all three of our reporting units: Consumer Bank, Commercial Bank and Institutional Bank. We perform our annual impairment test as of October 1st and on an interim basis if events or changes in circumstances between annual tests suggest additional testing is needed. Effective January 1, 2020, we adopted ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” eliminating the second step of goodwill impairment testing. Under the new guidance, if the fair value of a reporting unit declines below its carrying value, an impairment charge will be recognized for any amount by which the carrying value exceeds the reporting unit’s fair value, to the extent that the loss recognized does not exceed the amount of the goodwill allocated to that reporting unit. The adoption of ASU 2017-04 did not impact our current financial condition or results of operations.

In consideration of the deterioration in macroeconomic conditions and industry and market conditions due to the
COVID-19 pandemic during the third quarter of 2020, we identified a triggering event and performed an interim quantitative test. Impairment indicators comprised economic conditions, including projections of the duration of current conditions and timing of a potential recovery; industry and market considerations; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting units; performance of our stock; and other relevant events. We utilized a qualitative approach to our annual goodwill impairment test as of October 1, 2020. No impairment was recorded in 2020 as a result of these assessments.

We continue to monitor the impairment indicators for goodwill and other intangible assets, and to evaluate the carrying amount of these assets quarterly. Additional information is provided in Note 12 (“Goodwill and Other Intangible Assets”).
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Derivatives and hedging
We primarily use interest rate swaps to hedge interest rate risk for asset and liability management purposes. These derivative instruments modify the interest rate characteristics of specified on-balance sheet assets and liabilities. Our accounting policies related to derivatives reflect the current accounting guidance, which provides that all derivatives should be recognized as either assets or liabilities on the balance sheet at fair value, after taking into account the effects of master netting agreements. Accounting for changes in the fair value (i.e., gains or losses) of a particular derivative depends on whether the derivative has been designated and qualifies as part of a hedging relationship, and further, on the type of hedging relationship.
The application of hedge accounting requires significant judgment to interpret the relevant accounting guidance, as well as to assess hedge effectiveness, identify similar hedged item groupings, and measure changes in the fair value of the hedged items. We believe our methods of addressing these judgments and applying the accounting guidance are consistent with both the guidance and industry practices. Additional information relating to our use of derivatives is included in Note 1 under the heading “Derivatives and Hedging,” and Note 8 (“Derivatives and Hedging Activities”).
Contingent liabilities, guarantees and income taxes
Note 22 (“Commitments, Contingent Liabilities, and Guarantees”) summarizes contingent liabilities arising from litigation and contingent liabilities arising from guarantees in various agreements with third parties under which we are a guarantor, and the potential effects of these items on the results of our operations. We record a liability for the fair value of the obligation to stand ready to perform over the term of a guarantee. Contingent aspects of guarantees within the scope of ASC 326 are assessed a reserve under CECL. There is a risk that our actual future payments in the event of a default by the guaranteed party could exceed the recorded amount. See Note 22 (“Commitments, Contingent Liabilities, and Guarantees”) for a comparison of the liability recorded and the maximum potential undiscounted future payments for the various types of guarantees that we had outstanding at December 31, 2020.
It is not always clear how the Internal Revenue Code and various state tax laws apply to transactions that we undertake. In the normal course of business, we may record tax benefits and then have those benefits contested by the IRS or state tax authorities. We have provided tax reserves that we believe are adequate to absorb potential adjustments that such challenges may necessitate. However, if our judgment later proves to be inaccurate, the tax reserves may need to be adjusted, which could have an adverse effect on our results of operations and capital.
Additionally, we conduct quarterly assessments that determine the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded. The available evidence used in connection with these assessments includes a history of pretax income, projected future taxable income, potential tax-planning strategies, and projected future reversals of deferred tax liabilities. These assessments are subjective and may change. Based on these criteria, and all available positive and negative evidence, we establish a valuation allowance for deferred tax assets when we are unable to conclude it is more likely than not that they will be realized. However, if our assessments prove incorrect, they could have a material adverse effect on our results of operations in the period in which they occur. For further information on our accounting for income taxes, see Note 1 (“Summary of Significant Accounting Policies”) and Note 14 (“Income Taxes”).

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Accounting and reporting developments

Accounting guidance pending adoption at December 31, 2020
Standard Required Adoption Description Effect on Financial Statements or
Other Significant Matters
ASU 2020-06,
Debt—Debt with
Conversion and
Other Options
(Subtopic
470-20) and
Derivatives and
Hedging—
Contracts in
Entity’s Own
Equity (Subtopic
815-40) 		January 1, 2022

Early adoption is
permitted. 		The ASU simplifies the accounting for convertible debt instruments by eliminating the
legacy accounting models for convertible instruments with beneficial conversion features
or cash conversion features. The guidance
also amends the guidance used to determine if
a freestanding financial instrument or an embedded feature qualifies for a scope
exception from derivative accounting. For freestanding financial instruments and embedded features that have all the
characteristics of a derivative instrument and
are potentially settled in an entity’s own stock,
the guidance simplifies the settlement assessment that entities are required to
perform. Also, the Update now requires the
use of the if-converted method for all
convertible instruments and includes the effect
of potential share settlement in diluted EPS if
the effect is more dilutive. The new guidance
also makes clarifications to the EPS
calculation. Further, the ASU expands
disclosure requirements.

The guidance should be applied on a modified retrospective or retrospective basis. 		The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.

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Our total European sovereign and non-sovereign debt exposure is presented in Figure 37.
Figure 37. European Sovereign and Non-Sovereign Debt Exposures
December 31, 2020
Short- and Long-
Term Commercial
Total (a)
Foreign Exchange
and Derivatives
with Collateral (b)
Net
Exposure
in millions
France:
Sovereigns — — —
Non-sovereign financial institutions — — —
Non-sovereign non-financial institutions $ 1 — $ 1
Total 1 — 1
Germany:
Sovereigns — — —
Non-sovereign financial institutions — — —
Non-sovereign non-financial institutions 33 — 33
Total 33 — 33
Italy:
Sovereigns — — —
Non-sovereign financial institutions — — —
Non-sovereign non-financial institutions — — —
Total — — —
Luxembourg:
Sovereigns — — —
Non-sovereign financial institutions — — —
Non-sovereign non-financial institutions — — —
Total — — —
Switzerland:
Sovereigns — — —
Non-sovereign financial institutions — 1 1
Non-sovereign non-financial institutions — — —
Total — 1 1
United Kingdom:
Sovereigns — — —
Non-sovereign financial institutions — $ 406 406
Non-sovereign non-financial institutions — — —
Total — 406 406
Total Europe:
Sovereigns — — —
Non-sovereign financial institutions — 407 407
Non-sovereign non-financial institutions 34 — 34
Total $ 34 $ 407 $ 441
(a) Represents our outstanding leases.
(b) Represents contracts to hedge our balance sheet asset and liability needs, and to accommodate our clients’ trading and/or hedging needs. Our derivative mark-to-market exposures are calculated and reported on a daily basis. These exposures are largely covered by cash or highly marketable securities collateral with daily collateral calls.
Our credit risk exposure is largely concentrated in developed countries with emerging market exposure essentially limited to commercial facilities; these exposures are actively monitored by management. We do not have at-risk exposures in the rest of the world.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information included under the caption “Risk Management — Market risk management” in the MD&A beginning on page 73 is incorporated herein by reference.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial performance for each of the past eight quarters is summarized in Figure 36 contained in the “Fourth Quarter Results” section in the MD&A.
Page Number
98

Management’s Annual Report on Internal Control over Financial Reporting

We are responsible for the preparation, content and integrity of the financial statements and other statistical data and analyses compiled for this annual report. The financial statements and related notes have been prepared in conformity with U.S. generally accepted accounting principles and include amounts which of necessity are based on management’s best estimates and judgments and give due consideration to materiality. We believe the financial statements and notes present fairly our financial position, results of operations and cash flows in all material respects.

We are responsible for establishing and maintaining a system of internal control that is designed to protect our assets and the integrity of our financial reporting as defined in the Securities Exchange Act of 1934, as amended. This corporate-wide system of controls includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles, and that receipts and expenditures of the Corporation are made only in accordance with authorizations of management and directors of the Corporation; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Corporation’s assets that could have a material effect on the consolidated financial statements. All employees are required to comply with our code of ethics. We conduct an annual certification process to ensure that our employees meet this obligation. Although any system of internal control can be compromised by human error or intentional circumvention of required procedures, we believe our system provides reasonable assurance that financial transactions are recorded and reported properly, providing an adequate basis for reliable financial statements.

During 2020, the Audit Committee of the Board of Directors met regularly with Management, internal audit, and the independent registered public accounting firm, Ernst & Young LLP, to review the scope of their audits and to discuss the evaluation of internal accounting controls and financial reporting matters. The independent registered public accounting firm and the internal auditors have free access to, and meet confidentially with, the audit committee to discuss appropriate matters. Also, the Corporation maintains a Disclosure Review Committee. This committee’s purpose is to design and maintain disclosure controls and procedures to ensure that material information relating to the financial and operating condition of the Corporation is properly reported to its Chief Executive Officer, Chief Financial Officer, General Auditor, and the Audit Committee of the Board of Directors in connection with the preparation and filing of periodic reports and the certification of those reports by the Chief Executive Officer and the Chief Financial Officer.

Management’s Assessment of Internal Control over Financial Reporting

Management assessed, with participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, the effectiveness of our internal control and procedures over financial reporting using criteria described in “Internal Control - Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on that assessment, we believe we maintained an effective system of internal control over financial reporting as of December 31, 2020.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Corporation's internal control over financial reporting as of December 31, 2020 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their accompanying report dated February 22, 2021.

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Christopher M. Gorman                        Donald R. Kimble
Chairman and Chief Executive Officer                 Chief Financial Officer
99

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of KeyCorp

Opinion on Internal Control over Financial Reporting

We have audited KeyCorp’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, KeyCorp maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of KeyCorp as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes of KeyCorp and our report dated February 22, 2021 expressed an unqualified opinion thereon.

Basis for Opinion
KeyCorp’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying financial statements. Our responsibility is to express an opinion on KeyCorp’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to KeyCorp in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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Cleveland, Ohio
February 22, 2021
100

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of KeyCorp

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of KeyCorp as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of KeyCorp at December 31, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), KeyCorp’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 22, 2021 expressed an unqualified opinion thereon.

Adoption of New Accounting Standard

As discussed in Note 1 and 5 to the consolidated financial statements, KeyCorp changed its method of accounting for credit losses in 2020 due to the adoption of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. As explained below, auditing KeyCorp’s allowance for loan and leases losses (ALLL), including the adoption of the new accounting guidance, was a critical audit matter.

Basis for Opinion

These financial statements are the responsibility of KeyCorp’s management. Our responsibility is to express an opinion on KeyCorp’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to KeyCorp in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
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Allowance for Loan and Lease Losses
Description of the matter
On January 1, 2020, KeyCorp adopted Topic 326, which resulted in an increase to the ALLL from continuing operations of $204 million. KeyCorp’s loan and lease portfolio totaled $101.2 billion as of December 31, 2020 and the associated ALLL was $1.6 billion. As discussed in Note 1 and 5 of the financial statements, the ALLL represents management’s current estimate of lifetime credit losses inherent in the loan portfolio at the balance sheet date. Management estimates the ALLL using relevant available information, from internal and external sources, relating to past events, current portfolio specific and economic conditions, and reasonable and supportable forecasts. The ALLL is the sum of (i) asset specific / individual loan reserves; (ii) quantitative (formulaic or pooled) reserves; and (iii) qualitative (judgmental) reserves. Management estimates the quantitative reserves using probability of default / loss given default / exposure at default models (“loss forecasting models”), as well as other estimation methods for smaller loan portfolios. The ALLL also considers qualitative factors related to idiosyncratic risk factors, changes in current economic conditions that may not be reflected in quantitatively derived results, and other relevant factors to reflect management’s best estimate of current expected credit losses.

Auditing management’s ALLL was complex due to the loss forecasting models used to compute the quantitative reserve and involves a high degree of subjectivity and judgment in evaluating management’s determination of the economic forecast and qualitative factor adjustments to the ALLL described above.
How we addressed the matter in our audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over KeyCorp’s ALLL process, including controls over the appropriateness of the ALLL methodology, the development, operation and monitoring of loss forecasting models, the reliability and accuracy of data used in developing the ALLL estimate, and management’s review and approval process over the economic forecast, qualitative adjustments and overall ALLL results.

With the assistance of EY specialists we tested management’s loss forecasting models including evaluating the conceptual soundness of model methodology, assessing model performance and governance, testing key modeling assumptions, including the reasonable and supportable forecast period, and independently recalculating model output. We also compared the underlying economic forecast data used to estimate the quantitative reserve to external sources to determine whether it was complete and accurate.

To test the qualitative factor adjustments, among other procedures, we assessed management’s methodology and considered whether relevant risks were reflected in the models and whether adjustments to the model output were appropriate. We tested the completeness, accuracy and relevance of the underlying data used to estimate the qualitative adjustments. We evaluated whether qualitative adjustments were reasonable based on changes in economic conditions, the loan portfolio, management’s policies and procedures, and lending personnel. For example, we evaluated the reasonableness of qualitative adjustments (or lack thereof) for concentrations of credit by independently comparing to loan portfolio information. We also assessed whether qualitative adjustments were consistent with publicly available information (e.g. macroeconomic data). Further, we performed an independent search for the existence of new or contrary information relating to risks impacting the qualitative factor adjustments to validate that management’s considerations are appropriate. Additionally, we evaluated whether the overall ALLL, inclusive of qualitative factor adjustments, appropriately reflects losses expected in the loan and lease portfolio by comparing to peer bank data.
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We have served as KeyCorp’s auditor since 1994.
Cleveland, Ohio
February 22, 2021


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Consolidated Balance Sheets
December 31,
in millions, except per share data 2020 2019
ASSETS
Cash and due from banks $ 1,091 $ 732
Short-term investments 16,194 1,272
Trading account assets 735 1,040
Securities available for sale 27,556 21,843
Held-to-maturity securities (fair value: $ 8,023 and $ 10,116 )
7,595 10,067
Other investments 621 605
Loans, net of unearned income of $ 449 and $ 630
101,185 94,646
Allowance for loan and lease losses ( 1,626 ) ( 900 )
Net loans 99,559 93,746
Loans held for sale (a)
1,583 1,334
Premises and equipment 753 814
Goodwill 2,664 2,664
Other intangible assets 188 253
Corporate-owned life insurance 4,286 4,233
Accrued income and other assets 6,812 5,494
Discontinued assets 699 891
Total assets $ 170,336 $ 144,988
LIABILITIES
Deposits in domestic offices:
NOW and money market deposit accounts $ 80,427 $ 66,714
Savings deposits 5,913 4,651
Certificates of deposit ($ 100,000 or more)
2,733 6,598
Other time deposits 3,010 5,054
Total interest-bearing deposits 92,083 83,017
Noninterest-bearing deposits 43,199 28,853
Total deposits 135,282 111,870
Federal funds purchased and securities sold under repurchase agreements 220 387
Bank notes and other short-term borrowings 759 705
Accrued expense and other liabilities 2,385 2,540
Long-term debt 13,709 12,448
Total liabilities 152,355 127,950
EQUITY
Preferred stock 1,900 1,900
Common Shares, $ 1 par value; authorized 2,100,000,000 and 2,100,000,000 shares; issued 1,256,702,081 and 1,256,702,081 shares
1,257 1,257
Capital surplus 6,281 6,295
Retained earnings 12,751 12,469
Treasury stock, at cost ( 280,928,782 and 279,513,530 shares)
( 4,946 ) ( 4,909 )
Accumulated other comprehensive income (loss) 738 26
Key shareholders’ equity 17,981 17,038
Noncontrolling interests — —
Total equity 17,981 17,038
Total liabilities and equity $ 170,336 $ 144,988
(a) Total loans held for sale include Real estate — residential mortgage loans held for sale at fair value of $ 264 million at December 31, 2020, and $ 140 million at December 31, 2019 .
See notes to Consolidated Financial Statements

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Consolidated Statements of Income
Year ended December 31,
dollars in millions, except per share amounts 2020 2019 2018
INTEREST INCOME
Loans $ 3,866 $ 4,267 $ 4,023
Loans held for sale 69 63 66
Securities available for sale 484 537 409
Held-to-maturity securities 222 262 284
Trading account assets 20 32 29
Short-term investments 18 61 46
Other investments 6 13 21
Total interest income 4,685 5,235 4,878
INTEREST EXPENSE
Deposits 347 853 517
Federal funds purchased and securities sold under repurchase agreements 6 2 11
Bank notes and other short-term borrowings 12 17 21
Long-term debt 286 454 420
Total interest expense 651 1,326 969
NET INTEREST INCOME 4,034 3,909 3,909
Provision for credit losses 1,021 445 246
Net interest income after provision for credit losses 3,013 3,464 3,663
NONINTEREST INCOME
Trust and investment services income 507 475 499
Investment banking and debt placement fees 661 630 650
Service charges on deposit accounts 311 337 349
Operating lease income and other leasing gains 167 162 89
Corporate services income 228 236 233
Cards and payments income 368 275 270
Corporate-owned life insurance income 139 136 137
Consumer mortgage income 176 63 43
Commercial mortgage servicing fees 80 77 69
Other income (a)
15 68 176
Total noninterest income 2,652 2,459 2,515
NONINTEREST EXPENSE
Personnel 2,336 2,250 2,309
Net occupancy 298 293 308
Computer processing 232 214 210
Business services and professional fees 196 186 184
Equipment 100 100 105
Operating lease expense 138 123 120
Marketing 97 96 102
FDIC assessment 32 31 72
Intangible asset amortization 65 89 99
OREO expense, net 8 13 6
Other expense 607 506 460
Total noninterest expense 4,109 3,901 3,975
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 1,556 2,022 2,203
Income taxes 227 314 344
INCOME (LOSS) FROM CONTINUING OPERATIONS 1,329 1,708 1,859
Income (loss) from discontinued operations 14 9 7
NET INCOME (LOSS) 1,343 1,717 1,866
Less: Net income (loss) attributable to noncontrolling interests — — —
NET INCOME (LOSS) ATTRIBUTABLE TO KEY $ 1,343 $ 1,717 $ 1,866
Income (loss) from continuing operations attributable to Key common shareholders $ 1,223 $ 1,611 $ 1,793
Net income (loss) attributable to Key common shareholders 1,237 1,620 1,800
Per Common Share:
Income (loss) from continuing operations attributable to Key common shareholders $ 1.26 $ 1.62 $ 1.72
Income (loss) from discontinued operations, net of taxes .01 .01 .01
Net income (loss) attributable to Key common shareholders (b)
1.28 1.63 1.73
Per Common Share — assuming dilution:
Income (loss) from continuing operations attributable to Key common shareholders $ 1.26 $ 1.61 $ 1.70
Income (loss) from discontinued operations, net of taxes .01 .01 .01
Net income (loss) attributable to Key common shareholders (b)
1.27 1.62 1.71
Cash dividends declared per Common Share $ .740 $ .710 $ .565
Weighted-average Common Shares outstanding (000) 967,783 992,091 1,040,890
Effect of convertible preferred stock — — —
Effect of Common Share options and other stock awards 7,024 10,163 13,792
Weighted-average Common Shares and potential Common Shares outstanding (000) (c)
974,807 1,002,254 1,054,682
(a) Net securities gains (losses) totaled $ 4 million for the year ended December 31, 2020, $ 20 million for the year ended December 31, 2019, and less than $ 1 million for the year ended December 31, 2018. For 2020, 2019, and 2018, we did no t have any impairment losses related to securities.
(b) EPS may not foot due to rounding.
(c) Assumes conversion of Common Share options and other stock awards and/or convertible preferred stock, as applicable.
See Notes to Consolidated Financial Statements.
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Consolidated Statements of Comprehensive Income
Year ended December 31,
in millions 2020 2019 2018
Net income (loss) $ 1,343 $ 1,717 $ 1,866
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) on securities available for sale, net of income taxes of $( 143 ), $( 151 ), and $( 19 )
452 488 ( 62 )
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $( 72 ), $( 93 ), and $ 11
226 300 36
Foreign currency translation adjustments, net of income taxes of $ 0 , $( 4 ), and $ 11
— 14 ( 23 )
Net pension and postretirement benefit costs, net of income taxes of $( 9 ), $( 13 ), and $ 3
34 42 10
Total other comprehensive income (loss), net of tax 712 844 ( 39 )
Comprehensive income (loss) 2,055 2,561 1,827
Less: Comprehensive income attributable to noncontrolling interests — — —
Comprehensive income (loss) attributable to Key $ 2,055 $ 2,561 $ 1,827
See Notes to Consolidated Financial Statements.

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Consolidated Statements of Changes in Equity
Key Shareholders’ Equity
dollars in millions, except per share amounts
Preferred
Shares
Outstanding
(000)
Common
Shares
Outstanding
(000)
Preferred
Stock
Common
Shares
Capital
Surplus
Retained
Earnings
Treasury
Stock, at
Cost
Accumulated
Other
Comprehensive
Income
(Loss)
Noncontrolling
Interests
BALANCE AT DECEMBER 31, 2017 521 1,069,084 $ 1,025 $ 1,257 $ 6,335 $ 10,335 $ ( 3,150 ) $ ( 779 ) 2
Cumulative effect from changes in accounting principle (a)
( 2 )
Other reclassification of AOCI
13
Net income (loss) 1,866
Other comprehensive income (loss) ( 39 )
Deferred compensation 21
Cash dividends declared
Common Shares ($ .565 per share)
( 590 )
Series D Preferred Stock ($ 50.00 per depositary share)
( 26 )
Series E Preferred Stock ($ 1.531252 per depositary share)
( 31 )
Series F Preferred Stock ($ .529688 per depositary share)
( 9 )
Issuance of Series F Preferred Stock 425 425 ( 13 )
Open market Common Share repurchases ( 54,006 ) ( 1,098 )
Employee equity compensation program Common Share repurchases ( 2,286 ) — ( 47 )
Common shares reissued (returned) for stock options and other employee benefit plans 6,711 ( 12 ) 114
Net contribution from (distribution to) noncontrolling interests ( 1 )
BALANCE AT DECEMBER 31, 2018 946 1,019,503 1,450 1,257 6,331 11,556 ( 4,181 ) ( 818 ) 1
Net income (loss)
1,717 —
Other comprehensive income (loss)
844
Deferred compensation
9
Cash dividends declared
Common Shares ($ .71 per share)
( 707 )
Series D Preferred Stock ($ 50.00 per depositary share)
( 26 )
Series E Preferred Stock ($ 1.531252 per depositary share)
( 31 )
Series F Preferred Stock ($ 1.4125 per depositary share)
( 24 )
Series G Preferred Stock ($ .882813 per depositary share)
( 16 )
Issuance of Series G Preferred Stock 450 450 ( 15 )
Open market Common Share repurchases
( 48,347 ) ( 835 )
Employee equity compensation program Common Share repurchases
( 1,901 ) ( 2 ) ( 33 )
Common Shares reissued (returned) for stock options and other employee benefit plans
7,934 ( 28 ) 140
Net contribution from (distribution to) noncontrolling interests
( 1 )
BALANCE AT DECEMBER 31, 2019 1,396 977,189 1,900 1,257 6,295 12,469 ( 4,909 ) 26 —
Cumulative effect from changes in accounting principle (b)
( 230 )
Other reclassification of AOCI
( 3 )
Net income (loss) 1,344 —
Other comprehensive income (loss) 712
Deferred compensation 4
Cash dividends declared
Common Shares ($ .74 per share)
( 723 )
Series D Preferred Stock ($ 50.00 per depositary share)
( 26 )
Series E Preferred Stock ($ 1.531252 per depositary share)
( 31 )
Series F Preferred Stock ($ 1.4125 per depositary share)
( 24 )
Series G Preferred Stock ($ 1.406252 per depositary share)
( 25 )
Open market Common Share repurchases ( 7,151 ) ( 134 )
Employee equity compensation program Common Share repurchases
( 1,823 ) ( 18 ) ( 36 )
Common Shares reissued (returned) for stock options and other employee benefit plans
7,558 — 133
BALANCE AT DECEMBER 31, 2020 1,396 975,773 $ 1,900 $ 1,257 $ 6,281 $ 12,751 $ ( 4,946 ) $ 738 —
(a) Includes the impact of implementing ASU 2014-09, ASU 2016-01, and ASU 2017-12.
(b) Includes the impact of implementing ASU 2016-13. See Notes to Consolidated Financial Statements.
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Consolidated Statements of Cash Flows
Year ended December 31,
in millions 2020 2019 2018
OPERATING ACTIVITIES
Net income (loss) $ 1,343 $ 1,717 $ 1,866
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision for credit losses 1,021 445 246
Depreciation and amortization expense, net 111 241 382
Accretion of acquired loans 28 50 86
Increase in cash surrender value of corporate-owned life insurance ( 119 ) ( 121 ) ( 117 )
Stock-based compensation expense 101 96 99
FDIC reimbursement (payments), net of FDIC expense — — ( 10 )
Deferred income taxes (benefit) ( 191 ) 53 98
Proceeds from sales of loans held for sale 14,076 11,980 14,019
Originations of loans held for sale, net of repayments ( 13,856 ) ( 11,704 ) ( 13,948 )
Net losses (gains) from sale of loans held for sale ( 233 ) ( 188 ) ( 183 )
Net losses (gains) and writedown on OREO — 7 —
Net losses (gains) on leased equipment ( 21 ) ( 17 ) 41
Net losses (gains) on sales of fixed assets 5 ( 2 ) 9
Net securities losses (gains) ( 4 ) ( 20 ) —
Net decrease (increase) in trading account assets 305 ( 191 ) ( 13 )
Gain on sale of KIBS — — ( 83 )
Other operating activities, net ( 893 ) 560 14
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,673 2,906 2,506
INVESTING ACTIVITIES
Cash received (used) in acquisitions, net of cash acquired — ( 185 ) —
Proceeds from sale of KIBS — — 124
Net decrease (increase) in short-term investments, excluding acquisitions ( 14,922 ) 1,290 1,885
Purchases of securities available for sale ( 15,619 ) ( 5,714 ) ( 4,594 )
Proceeds from sales of securities available for sale 583 362 —
Proceeds from prepayments and maturities of securities available for sale 9,923 3,586 3,197
Proceeds from prepayments and maturities of held-to-maturity securities 2,493 1,477 1,558
Purchases of held-to-maturity securities ( 17 ) ( 22 ) ( 1,242 )
Purchases of other investments ( 134 ) ( 52 ) ( 28 )
Proceeds from sales of other investments 101 60 62
Proceeds from prepayments and maturities of other investments 15 56 40
Net decrease (increase) in loans, excluding acquisitions, sales, and transfers ( 7,358 ) ( 6,190 ) ( 3,700 )
Proceeds from sales of portfolio loans 211 399 204
Proceeds from corporate-owned life insurance 66 59 78
Purchases of premises, equipment, and software ( 63 ) ( 85 ) ( 99 )
Proceeds from sales of premises and equipment — 18 2
Proceeds from sales of OREO — 23 31
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ( 24,721 ) ( 4,918 ) ( 2,482 )
FINANCING ACTIVITIES
Net increase (decrease) in deposits, excluding acquisitions 23,412 4,561 2,074
Net increase (decrease) in short-term borrowings ( 113 ) 229 ( 148 )
Net proceeds from issuance of long-term debt 3,607 2,129 2,306
Payments on long-term debt ( 2,508 ) ( 3,634 ) ( 2,880 )
Issuance of preferred shares — 435 412
Repurchase of Common Shares ( 134 ) ( 835 ) ( 1,098 )
Employee equity compensation program Common Share repurchases ( 36 ) ( 33 ) ( 47 )
Net proceeds from reissuance of Common Shares 8 18 20
Cash dividends paid ( 829 ) ( 804 ) ( 656 )
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 23,407 2,066 ( 17 )
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 359 54 7
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 732 678 671
CASH AND DUE FROM BANKS AT END OF YEAR $ 1,091 $ 732 $ 678
Additional disclosures relative to cash flows:
Interest paid $ 731 $ 1,251 $ 892
Income taxes paid (refunded) 241 18 12
Noncash items:
Reduction of secured borrowing and related collateral $ 7 5 $ 20
Loans transferred to portfolio from held for sale 75 157 24
Loans transferred to held for sale from portfolio 310 468 ( 33 )
Loans transferred to other real estate owned 96 29 25
CMBS risk retentions 40 59 16
ABS risk retentions 19 12 —
See Notes to Consolidated Financial Statements.

107

1. Summary of Significant Accounting Policies

Organization

We are one of the nation’s largest bank-based financial services companies, providing deposit, lending, cash management, and investment services to individuals and small and medium-sized businesses through our subsidiary, KeyBank. We also provide a broad range of sophisticated corporate and investment banking products, such as merger and acquisition advice, public and private debt and equity, syndications, and derivatives to middle market companies in selected industries throughout the United States through our subsidiary, KBCM. As of December 31, 2020, KeyBank operated 1,073 full-service retail banking branches and 1,386 ATMs in 15 states, as well as additional offices, online and mobile banking capabilities, and a telephone banking call center. Additional information pertaining to our two major business segments, Consumer Bank and Commercial Bank, is included in Note 25 (“Business Segment Reporting”).

Use of Estimates

Our accounting policies conform to GAAP and prevailing practices within the financial services industry. We must make certain estimates and judgments when determining the amounts presented in our consolidated financial statements and the related notes. If these estimates prove to be inaccurate, actual results could differ from those reported.

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of KeyCorp and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Some previously reported amounts have been reclassified to conform to current reporting practices.

The consolidated financial statements also include the accounts of any voting rights entities in which we have a controlling financial interest and certain VIEs. In accordance with the applicable accounting guidance for consolidations, we consolidate a VIE if we have the power to direct activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. See Note 13 (“Variable Interest Entities”) for information on our involvement with VIEs.

We use the equity method to account for unconsolidated investments in voting rights entities or VIEs if we have significant influence over the entity’s operating and financing decisions (usually defined as a voting or economic interest of 20% to 50%, but not controlling). Unconsolidated investments in voting rights entities or VIEs in which we have a voting or economic interest of less than 20% generally are carried at fair value or a cost measurement alternative.

In preparing these financial statements, subsequent events were evaluated through the time the financial statements were issued. Financial statements are considered issued when they are widely distributed to all shareholders and other financial statement users or filed with the SEC.

Cash and Cash Equivalents

Cash and due from banks are considered “cash and cash equivalents” for financial reporting purposes. We do not consider cash on deposit with the Federal Reserve to be restricted.

Loans

Loans held in portfolio, which management has the intent and ability to hold for the foreseeable future or until maturity or payoff, are carried at the principal amount outstanding, net of unearned income, including net deferred loan fees and costs and unamortized premiums and discounts. We defer certain nonrefundable loan origination and commitment fees, and the direct costs of originating or acquiring loans. The net deferred amount is amortized over the estimated lives of the related loans as an adjustment to the yield.

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Accrued interest on loans is included in "other assets" on the balance sheet and is excluded from the calculation of the allowance for credit losses due to our charge-off policy to reverse accrued interest on nonperforming loans against interest income in a timely manner. Certain loans that received a payment deferral or forbearance under a COVID-19 hardship relief program have not been classified as nonperforming loans and continue to accrue and recognize interest income during the period of the deferral. We, therefore, recognize an allowance for credit losses for accrued interest receivable amounts that result from deferred payments under a COVID-19 hardship relief program because those amounts would not be considered to be written off in a timely manner. As of December 31, 2020, the allowance for credit losses on accrued interest receivable was immaterial.

Sales-type leases are carried at the aggregate of the lease receivable, estimated unguaranteed residual values, and deferred initial direct fees and costs if certain criteria are met. Direct financing leases are carried at the aggregate of the lease receivable, estimated unguaranteed residual values, and deferred initial direct fees and costs, less unearned income. Unearned income on direct financing leases is amortized over the lease terms using a method approximating the interest method that produces a constant rate of return. Deferred initial direct fees and costs for both sales-type and direct financing leases are amortized over the lease terms as an adjustment to the yield.

Expected credit losses on net investments in leases, including any unguaranteed residual asset, are included in the ALLL. Net gains or losses on sales of lease residuals are included in “other income” or “other expense” on the income statement. Additional information pertaining to the value of lease residuals is provided in Note 10 (“Leases”).

Loans Held for Sale

Loans held for sale generally include certain residential and commercial mortgage loans, other commercial loans, and student loans. Loans are initially classified as held for sale when they are individually identified as being available for immediate sale and a formal plan exists to sell them. Loans held for sale are recorded at either fair value, if elected, or the lower of cost or fair value. Fair value is determined based on available market data for similar assets. When a loan is originated as held-for-sale, origination fees and costs are deferred but not amortized. Upon sale of the loans, deferred origination fees and costs are recognized as part of the calculated gain or loss on sale. Our commercial loans (including commercial mortgage and non-mortgage loans) and student loans, which we originated and intend to sell, are carried at the lower of aggregate cost or fair value. Subsequent declines in fair value for loans held for sale are recognized as a charge to “other income” on the income statement. Consumer real estate - residential mortgages loans have been elected to be carried at fair value. Subsequent increases and decreases in fair value for loans elected to be measured at fair value are recorded to “consumer mortgage income” on the income statement. Additional information regarding fair value measurements associated with our loans held for sale is provided in Note 6 (“Fair Value Measurements”).

We may transfer certain loans to held for sale at the lower of cost or fair value. If a loan is transferred from the loan portfolio to the held-for-sale category, any write-down in the carrying amount of the loan at the date of transfer is recorded as a reduction in the ALLL. When a loan is transferred into the held for sale category, we stop amortizing the related deferred fees and costs. The remaining unamortized fees and costs are recognized as part of the cost basis of the loan at the time it is sold. We may also transfer loans from held for sale to the loan portfolio held for investment. If a loan held for sale for which fair value accounting was elected is transferred to held for investment, it will continue to be accounted for at fair value in the loan portfolio.

Nonperforming Loans

Nonperforming loans are loans for which we do not accrue interest income, and include commercial and consumer
loans and leases, as well as current year TDRs and nonaccruing TDR loans from prior years. Nonperforming loans
do not include loans held for sale. Once a loan is designated nonaccrual, the interest accrued but not collected is reversed against interest income, and payments subsequently received are applied to principal until qualifying for
return to accrual.

We generally classify commercial loans as nonperforming and stop accruing interest (i.e., designate the loan “nonaccrual”) when the borrower’s principal or interest payment is 90 days past due unless the loan is well-secured and in the process of collection. Commercial loans are also placed on nonaccrual status when payment is not past due but we have serious doubts about the borrower’s ability to comply with existing repayment terms. Once a loan is designated nonaccrual (and as a result assessed for impairment), the interest accrued but not collected is generally charged against the ALLL, and payments subsequently received are applied to principal. Commercial
109

loans are typically charged off in full or charged down to the fair value of the underlying collateral when the borrower’s payment is 180 days past due.

We classify consumer loans as nonperforming and stop accruing interest when the borrower’s payment is 120 days past due, unless the loan is well-secured and in the process of collection. Any second lien home equity loan with an associated first lien that is 120 days or more past due or in foreclosure, or for which the first mortgage delinquency timeframe is unknown, is reported as a nonperforming loan. Secured loans that are discharged through Chapter 7 bankruptcy and not formally re-affirmed are designated as nonperforming and TDRs. Our charge-off policy for most consumer loans takes effect when payments are 120 days past due. Home equity and residential mortgage loans generally are charged down to net realizable value when payment is 180 days past due. Credit card loans and similar unsecured products continue to accrue interest until the account is charged off at 180 days past due.

Commercial and consumer loans may be returned to accrual status if we are reasonably assured that all contractually due principal and interest are collectible and the borrower has demonstrated a sustained period (generally six months ) of repayment performance under the contracted terms of the loan and applicable regulation.
Purchased Loans
Purchased performing loans that do not have evidence of deterioration in credit quality at acquisition are recorded at fair value at the acquisition date. Any premium or discount associated with purchased performing loans is recognized as interest income based on the effective yield method of amortization for term loans or the straight-line method of amortization for revolving loans. The methods utilized to estimate the required ALLL for purchased performing loans is similar to originated loans.
Purchased loans that have experienced a more-than-insignificant deterioration in credit quality since origination are deemed PCD loans. PCD loans are initially recorded at fair value along with an allowance for credit losses determined using the same methodology as originated loans. The sum of the loan's purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through provision for credit losses.
Allowance for Loan and Lease Losses
We estimate the ALLL using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The ALLL is measured on a collective (pool) basis when similar risk characteristics exist. Our portfolio segments include commercial and consumer. Each of these two segments comprises multiple loan classes. Classes are characterized by similarities in initial measurement, risk attributes, and the manner in which we monitor and assess credit risk. The commercial segment is composed of commercial and industrial, commercial real estate, and commercial lease financing loan classes. The consumer lending segment is composed of residential mortgage, home equity, consumer direct, credit card, student lending and consumer indirect loan classes.

The ALLL represents our current estimate of lifetime credit losses inherent in our loan portfolio at the balance sheet date. In determining the ALLL, we estimate expected future losses for the loan's entire contractual term adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications.

The ALLL is the sum of three components: (i) asset specific/ individual loan reserves; (ii) quantitative (formulaic or pooled) reserves; and (iii) qualitative (judgmental) reserves.

Asset Specific / Individual Component

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation. We have elected to apply the practical expedient to measure expected credit losses of a collateral dependent asset using the fair value of the collateral, less any costs to sell, when foreclosure is not probable, when repayment of the loan is expected to be provided substantially through the operation or sale of the collateral, and the borrower is experiencing financial difficulty.


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Individual reserves are determined as follows:
• For commercial non-accruing loans greater than or equal to a defined dollar threshold, individual reserves are determined based on an analysis of the present value of the loan's expected future cash flows or the fair value of the collateral less costs to sell.
• For commercial non-accruing loans below the defined dollar threshold, an established LGD percentage is multiplied by the loan balance and the results are aggregated for purposes of measuring specific reserve impairment.
• The population of individually assessed consumer loans includes loans deemed collateral dependent, in addition to all TDRs. The expected loss for these loans is estimated based on the present value of the loan's expected future cash flows, except in instances where the loan is collateral dependent, in which case the loan is written down based on the collateral's fair market value less costs to sell.

Quantitative Component

We use a non-DCF factor-based approach to estimate expected credit losses that include component PD/LGD/EAD
models as well as less complex estimation methods for smaller loan portfolios.
• PD: This component model is used to estimate the likelihood that a borrower will cease making payments as agreed. The major contributors to this are the borrower credit attributes and macro-economic trends. The objective of the PD model is to produce default likelihood forecasts based on the observed loan-level information and projected paths of macroeconomic variables.
• LGD: This component model is used to estimate the loss on a loan once a loan is in default.
• EAD: Estimates the loan balance at the time the borrower stops making payments. For all term loans, an amortization based formulaic approach is used for account level EAD estimates. We calculate EAD using a portfolio specific method in each of our revolving product portfolios. For line products that are unconditionally cancellable, the balances will either use a paydown curve or be held flat through the life of the loan.
Qualitative Component
The ALLL also includes identified qualitative factors related to idiosyncratic risk factors, changes in current economic conditions that may not be reflected in quantitatively derived results, and other relevant factors to ensure the ALLL reflects our best estimate of current expected credit losses. While our reserve methodologies strive to reflect all relevant risk factors, there continues to be uncertainty associated with, but not limited to, potential imprecision in the estimation process due to the inherent time lag of obtaining information and normal variations between estimates and actual outcomes. We provide additional reserves that are designed to provide coverage for losses attributable to such risks. The ALLL also includes factors that may not be directly measured in the determination of individual or collective reserves. Such qualitative factors may include:
• The nature and volume of the institution’s financial assets;
• The existence, growth, and effect of any concentrations of credit;
• The volume and severity of past due financial assets, the volume of nonaccrual assets, and the volume and severity of adversely classified or graded assets;
• The value of the underlying collateral for loans that are not collateral dependent;
• The institution’s lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries;
• The quality of the institution’s credit review function;
• The experience, ability, and depth of the institution’s lending, investment, collection, and other relevant management and staff;
• The effect of other external factors such as the regulatory, legal and technological environments; competition; and events such as natural disasters; and
• Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the institution operates that affect the collectability of financial assets.



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Liability for Credit Losses on Lending-Related Commitments
The liability for credit losses on lending-related commitments, such as letters of credit and unfunded loan commitments, is included in “accrued expense and other liabilities” on the balance sheet. Expected credit losses are estimated over the contractual period in which we are exposed to credit risk via a contractual obligation unless that obligation is unconditionally cancellable by us. The liability for credit losses on lending-related commitments is adjusted as a provision for credit losses. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated useful life. Consistent with our estimation process on our loan and lease portfolio, we use a non-DCF factor-based approach to estimate expected credit losses that include component PD/LGD/EAD models as well as less complex estimation methods for smaller portfolios.
Allowance for Credit Losses on Other Financial Assets
The allowance for credit losses on other financial assets, such as other receivables and servicing advances, is
determined based on historical loss information and other available indicators. If such information does not indicate
any expected credit losses, Key may estimate the allowance for credit losses on other financial assets to be zero or
close to zero. As of December 31, 2020, the allowance for credit losses on other financial assets was immaterial.
Fair Value Measurements
Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants in the principal market. Therefore, fair value represents an exit price at the measurement date. We value our assets and liabilities based on the principal or most advantageous market where each would be sold (in the case of assets) or transferred (in the case of liabilities). In the absence of observable market transactions, we consider liquidity valuation adjustments to reflect the uncertainty in pricing the instruments.
Valuation inputs can be observable or unobservable. Observable inputs are assumptions based on market data obtained from an independent source. Unobservable inputs are assumptions based on our own information or assessment of assumptions used by other market participants in pricing the asset or liability. Our unobservable inputs are based on the best and most current information available on the measurement date.
All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy that gives the highest ranking to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest ranking to unobservable inputs (Level 3). Fair values for Level 2 assets and liabilities are based on one or a combination of the following factors: (i) quoted market prices for similar assets or liabilities; (ii) observable inputs, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data. The level in the fair value hierarchy ascribed to a fair value measurement in its entirety is based on the lowest level input that is significant to the measurement. Assets and liabilities may transfer between levels based on the observable and unobservable inputs used at the valuation date.
Assets and liabilities are recorded at fair value on a recurring or nonrecurring basis. Nonrecurring fair value adjustments are typically recorded as a result of the application of lower of cost or fair value accounting; or impairment. At a minimum, we conduct our valuations quarterly.
Additional information regarding fair value measurements and disclosures is provided in Note 6 (“Fair Value Measurements”).
Short-Term Investments
Short-term investments consist of segregated, interest-bearing deposits due from banks, the Federal Reserve, and certain non-U.S. banks as well as reverse repurchase agreements and United States Treasury Bills with an original maturity of three months or less.
Trading Account Assets
Trading account assets are debt and equity securities, as well as commercial loans, that we purchase and hold but intend to sell in the near term. These assets are reported at fair value. Realized and unrealized gains and losses on trading account assets are reported in “other income” on the income statement.
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Securities
Securities available for sale. Debt securities that we intend to hold for an indefinite period of time but that may be sold in response to changes in interest rates, prepayment risk, liquidity needs, or other factors are classified as available-for-sale and reported at fair value. Realized gains and losses resulting from sales of securities using the specific identification method, are included in “other income” on the income statement. Unrealized holding gains are recorded through other comprehensive income. Unrealized losses in fair value below the amortized cost basis are assessed to determine whether the impairment gets recorded through other comprehensive income or through earnings using a valuation allowance.
For available-for-sale securities in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of these criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value in “other income” on the income statement. For debt securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized costs, the nature of the security, the underlying collateral, and the financial condition of the issuers, among other factors. If this assessment indicates a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for available-for-sale securities is recorded for the credit loss, limited by the amount that the fair value is less than the amortized costs basis. Any impairment that has not been recorded through an allowance for available-for-sale securities is recognized in other comprehensive income.
Changes in the allowance available-for-sale are recorded as provision for (or reversal of) credit loss. Losses are charged against the allowance for available-for-sale securities when management believes the uncollectibility of an available-for-sale security is confirmed or when either criteria regarding intent or requirement to sell is met.
“Other securities” held in the available-for-sale portfolio consist of convertible preferred stock of privately held companies. For additional information, refer to Note 7 (“Securities”).
Held-to-maturity securities. Debt securities that we have the intent and ability to hold until maturity are classified as held-to-maturity and are carried at cost and adjusted for amortization of premiums and accretion of discounts using the interest method. This method produces a constant rate of return on the adjusted carrying amount.
The held-to-maturity portfolio is classified by the following major security types: agency residential collateralized mortgage obligations, agency residential mortgage-backed securities, agency commercial mortgage-backed securities, asset backed securities, and other. “Other securities” held in the held-to-maturity portfolio consist of foreign bonds and capital securities. Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type. The estimate of expected losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. We do not measure expected credit losses on held-to-maturity securities in which historical credit loss information adjusted for current conditions and reasonable and supportable forecasts results in an expectation that nonpayment of the amortized cost basis is zero.

All of our mortgage-backed securities are issued by U.S. government-sponsored enterprises or GNMA, are highly rated by major rating agencies and have a long history of no credit losses. Other securities are comprised of State of Israel bonds denominated and paid in U.S. dollars. Israel bonds have a long history of no credit losses. Additionally, as of December 31, 2020, the State of Israel's credit rating remains "stable" among Fitch, Moody's, and S&P (A+, A1, AA-).
Other Investments
Other investments include equity and mezzanine instruments as well as other types of investments that generally are carried at the alternative cost method. The alternative cost method results in these investments being recorded at cost, less any impairment, plus or minus changes resulting from observable market transactions. Adjustments are included in “other income” on the income statement.

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Derivatives and Hedging
All derivatives are recognized on the balance sheet at fair value in “accrued income and other assets” or “accrued expense and other liabilities.” The net increase or decrease in derivatives is included in “other operating activities, net” within the statement of cash flows. Accounting for changes in fair value (i.e., gains or losses) of derivatives differs depending on whether the derivative has been designated and qualifies as part of a hedge relationship, and on the type of hedge relationship. For derivatives that are not in a hedge relationship, any gain or loss, as well as any premium paid or received, is recognized immediately in earnings in “corporate services income” or “other income” on the income statement, depending whether the derivative is for customer accommodation or risk management, respectively. A derivative that is designated and qualifies as a hedging instrument must be designated as a fair value hedge, a cash flow hedge, or a hedge of a net investment in a foreign operation. Changes in the fair value of a hedging instrument are reflected in the same income statement line as the earnings effect of the change in fair value of the hedged item attributable to the hedged risk.
A fair value hedge is used to limit exposure to changes in the fair value of existing assets, liabilities, and commitments caused by changes in interest rates or other economic factors. The change in the fair value of an instrument designated as a fair value hedge is recorded in earnings at the same time as a change in fair value of the hedged item attributable to the hedged risk.
A cash flow hedge is used to minimize the variability of future cash flows that is caused by changes in interest rates or other economic factors. The gain or loss on a cash flow hedge is recorded as a component of AOCI on the balance sheet and reclassified to earnings in the same period in which the hedged transaction affects earnings (e.g., when we incur variable-rate interest on debt, earn variable-rate interest on loans, or sell commercial real estate loans).
A net investment hedge is used to hedge the exposure of changes in the carrying value of investments as a result of changes in the related foreign exchange rates. The gain or loss on a net investment hedge is recorded as a component of AOCI on the balance sheet when the terms of the derivative match the notional and currency risk being hedged. The amount in AOCI is reclassified into income when the hedged transaction affects earnings (e.g., when we dispose or liquidate a foreign subsidiary).
Hedge “effectiveness” is determined by the extent to which changes in the fair value of a derivative instrument offset changes in the fair value, cash flows, or carrying value attributable to the risk being hedged. If the relationship between the change in the fair value of the derivative instrument and the change in the hedged item falls within a range considered to be the industry norm, the hedge is considered “highly effective” and qualifies for hedge accounting. A hedge is “ineffective” if the relationship between the changes falls outside the acceptable range. In that case, hedge accounting is discontinued on a prospective basis. Hedge effectiveness is tested at least quarterly.
We take into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts held with a single counterparty on a net basis, and to offset the net derivative position with the related cash collateral when recognizing derivative assets and liabilities. As a result, we could have derivative contracts with negative fair values included in derivative assets on the balance sheet and contracts with positive fair values included in derivative liabilities. Derivative assets and derivative liabilities are recorded within “accrued income and other assets” and “accrued expense and other liabilities,” respectively.
Additional information regarding the accounting for derivatives is provided in Note 8 (“Derivatives and Hedging Activities”).
Loan Sales and Securitizations
We sell and at times may securitize loans and other financial assets. We recognize the sale and securitization of loans or other financial assets when the transferred assets are legally isolated from our creditors and the appropriate accounting criteria are met. When we securitize loans or other financial assets, we may retain a portion of the securities issued, including senior interests, subordinated interests, interest-only strips, servicing rights, and other interests, all of which are considered retained interests in the transferred assets. The interests are initially measured at fair value which is based on independent third party market prices or market prices for similar assets. If market prices are not available, fair value is estimated based on the present value of expected future cash flows using assumptions as to discount rates, interest rates, prepayment speeds, and credit losses. Loans sold or securitized are removed from the balance sheet and a net gain or loss is recognized in “other income” at the time of
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sale. Gains or losses recognized depend on the fair value of the loans sold and the retained interests at the date of sale.
Servicing Assets
We service commercial real estate and residential mortgage loans. Servicing assets and liabilities purchased or retained are initially measured at fair value and are recorded as a component of “accrued income and other assets” on the balance sheet. When no ready market value (such as quoted market prices, or prices based on sales or purchases of similar assets) is available to determine the fair value of servicing assets, fair value is determined by calculating the present value of future cash flows associated with servicing the loans. This calculation is based on a number of assumptions, including the market cost of servicing, the discount rate, the prepayment rate, and the default rate.
We account for our servicing assets using the amortization method. The amortization of servicing assets is determined in proportion to, and over the period of, the estimated net servicing income and recorded in “mortgage servicing fees” on the income statement.
Servicing assets are evaluated quarterly for possible impairment. This process involves stratifying the assets based upon one or more predominant risk characteristics and determining the fair value of each class. The characteristics may include financial asset type, size, interest rate, date of origination, term and geographic location. If the evaluation indicates that the carrying amount of the servicing assets exceeds their fair value, the carrying amount is reduced by recording a charge to income in the amount of such excess and establishing a valuation reserve allowance. If impairment is determined to be other-than-temporary, a direct write-off of the carrying amount would be recorded. Additional information pertaining to servicing assets is included in Note 9 (“Mortgage Servicing Assets”).
Leases
For leases where Key is the lessee that have initial terms greater than one year, right-of-use assets and corresponding lease liabilities are reported on the balance sheet. Leases with an initial term of less than one year are not recorded on the balance sheet. Our leases where Key is the lessee are primarily classified as operating leases. Operating lease expense is recognized in "net occupancy" and "equipment"on a straight-line basis over the lease term. For additional information, see Note 10 (“Leases”).

Premises and Equipment
Premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation and amortization. We determine depreciation of premises and equipment using the straight-line method over the estimated useful lives of the particular assets. Leasehold improvements are amortized using the straight-line method over the shorter of their useful lives or terms of the leases. Premises and equipment are evaluated for impairment whenever events or circumstances indicate that the carrying value of the asset may not be recoverable.
Goodwill and Other Intangible Assets
Goodwill represents the amount by which the cost of net assets acquired in a business combination exceeds their f air value. Goodwill is assigned to reporting units as of the acquisition date based on the expected benefit to such reporting unit from the synergies of the business combination. Goodwill is not amortized. Goodwill is tested at the reporting unit level for impairment, at least annually as of October 1, or when indicators of impairment exist.
We may elect to perform a qualitative analysis to determine whether or not it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If we elect to bypass this qualitative analysis, or conclude via qualitative analysis that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value, a quantitative goodwill impairment test is performed. If the fair value is less than the carrying value, an impairment charge is recorded for the difference.

The amount of capital being allocated to our reporting units as a proxy for the carrying value is based on risk-based regulatory capital requirements. Fair values are estimated using a combination of market and income approaches. The market approach incorporates comparable public company multiples along with data related to recent merger and acquisition activity. The income approach consists of discounted cash flow modeling that utilizes internal
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forecasts and various other inputs and assumptions. A multi-year internal forecast is prepared for each reporting unit and a terminal growth rate is estimated for each one based on market expectations of inflation and economic conditions in the financial services industry. Earnings projections for reporting units are adjusted for after tax cost savings expected to be realized by a market participant. The discount rate applied to our cash flows is derived from the CAPM. The buildup to the discount rate includes a risk-free rate, 5-year adjusted beta based on peer companies, a market equity risk premium, a size premium and a company specific risk premium. The discount rates differ between our reporting units as they have different levels of risk. A sensitivity analysis is typically performed on key assumptions, such as the discount rates and cost savings estimates.
Other intangible assets with finite lives are amortized on either an accelerated or straight-line basis. We monitor for impairment indicators for goodwill and other intangible assets on a quarterly basis. Additional information pertaining to goodwill and other intangible assets is included in Note 12 (“Goodwill and Other Intangible Assets”).
Business Combinations
We account for our business combinations using the acquisition method of accounting. Under this accounting method, the acquired company’s assets and liabilities are recorded at fair value at the date of acquisition, except as provided for by the applicable accounting guidance, and the results of operations of the acquired company are combined with Key’s results from the date of acquisition forward. Acquisition costs are expensed when incurred. The difference between the purchase price and the fair value of the net assets acquired (including identifiable intangible assets) is recorded as goodwill. Our accounting policy for intangible assets is summarized in this note under the heading “Goodwill and Other Intangible Assets.”
Additional information regarding acquisitions is provided in Note 15 (“Acquisitions, Divestiture, and Discontinued Operations”).

Securities Financing Activities

We enter into repurchase agreements to finance overnight customer sweep deposits. We also enter into repurchase and reverse repurchase agreements to settle other securities obligations. We account for these securities financing agreements as collateralized financing transactions. Repurchase and reverse repurchase agreements are recorded on the balance sheet at the amounts that the securities will be subsequently sold or repurchased. Securities borrowed transactions are recorded on the balance sheet at the amounts of cash collateral advanced. While our securities financing agreements incorporate a right of set off, the assets and liabilities are reported on a gross basis. Reverse repurchase agreements and securities borrowed transactions are included in “short-term investments” on the balance sheet; repurchase agreements are included in “federal funds purchased and securities sold under repurchase agreements.” Fees received in connection with these transactions are recorded in interest income; fees paid are recorded in interest expense.

Additional information regarding securities financing activities is included in Note 16 (“Securities Financing Activities”).

Contingencies and Guarantees

We recognize liabilities for the fair value of our obligations under certain guarantees issued. These liabilities are included in “accrued expense and other liabilities” on the balance sheet. If we receive a fee for a guarantee requiring liability recognition, the amount of the fee represents the initial fair value of the “stand ready” obligation. If there is no fee, the fair value of the stand ready obligation is determined using expected present value measurement techniques, unless observable transactions for comparable guarantees are available. The subsequent accounting for these stand ready obligations depends on the nature of the underlying guarantees. We account for our release from risk under a particular guarantee when the guarantee expires or is settled, or by a systematic and rational amortization method, depending on the risk profile of the guarantee. Contingent aspects of guarantees within the scope of ASC 326 are assessed a reserve under CECL.
Contingent liabilities may result from litigation, claims and assessments, loss or damage to Key. We recognize liabilities from contingencies when a loss is probable and can be reasonably estimated.
Additional information regarding contingencies and guarantees is included in Note 22 (“Commitments, Contingent Liabilities, and Guarantees”).
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Revenue Recognition
We recognize revenues as they are earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. Our principal source of revenue is interest income from loans and investments. We also earn noninterest income from various banking and financial services offered through both the Commercial and Consumer banks.
Interest Income. The largest source of revenue for us is interest income. Interest income is primarily recognized on an accrual basis according to nondiscretionary formulas in written contracts, such as loan agreements or securities contracts.
Noninterest Income. We earn noninterest income through a variety of financial and transaction services provided to commercial and consumer clients. Revenue is recorded for noninterest income based on the contractual terms for the service or transaction performed. In certain circumstances, noninterest income is reported net of associated expenses.
Trust and Investment Services Income. Trust and investment services revenues include brokerage commissions trust and asset management commissions.
Revenue from trade execution and brokerage services is earned through commissions from trade execution on behalf of clients. Revenue from these transactions is recognized at the trade date. Any ongoing service fees are recognized on a monthly basis as services are performed.
Trust and asset management services include asset custody and investment management services provided to individual and institutional customers. Revenue is recognized monthly based on a minimum annual fee, and the market value of assets in custody. Additional fees are recognized for transactional activity at a point in time.
Investment Banking and Debt Placement Fees. Investment banking and debt placement fees primarily represent revenues earned by KeyBanc Capital Markets for various corporate services including advisory, debt placement and underwriting. Revenues for these services are recorded at a point in time, upon completion of a contractually identified transaction, or when an advisory opinion is provided. Investment banking and debt placement costs are reported on a gross basis within other expense on the income statement.
Service Charges on Deposit Accounts. Revenue from service charges on deposit accounts is earned through cash management, wire transfer, and other deposit-related services as well as overdraft, non-sufficient funds, account management and other deposit-related fees. Revenue is recognized for these services either over time, corresponding with deposit accounts’ monthly cycle, or at a point in time for transactional related services and fees. Certain reward costs are netted within revenues from service charges on deposits.
Corporate Services Income. Corporate services income includes various ancillary service revenue including letter of credit fees, loan fees, and certain capital market fees. Revenue from these fees is recorded in a manner that reflects the timing of when transactions occur, and as services are provided.
Cards and Payments income. Cards and payments income includes interchange fees from consumer credit and debit cards processed through card association networks, merchant services, and other card related services. Interchange rates are generally set by the credit card associations and based on purchase volumes and other factors. Interchange fees are recognized as transactions occur. Certain card network costs and reward costs are netted within interchange revenues. Merchant services income represents account management fees and transaction fees charged to merchants for the processing of card association network transactions. Merchant services revenue is recognized as transactions occur, or as services are performed.
Corporate-Owned Life Insurance Income. Income from corporate-owned life insurance primarily represents changes in the cash surrender value of life insurance policies held on certain key employees. Revenue is recognized in each period based on the change in the cash surrender value during the period.
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Stock-Based Compensation
Stock-based compensation is measured using the fair value method of accounting on the grant date. The measured cost is recognized over the period during which the recipient is required to provide service in exchange for the award. We estimate expected forfeitures when stock-based awards are granted and record compensation expense only for awards that are expected to vest. Compensation expense related to awards granted to employees is recorded in “personnel expense” on the Consolidated Statements of Income while compensation expense related to awards granted to directors is recorded in “other expense.”
We recognize compensation expense for stock-based, mandatory deferred incentive compensation awards using the accelerated method of amortization over a period of approximately 5 years (the current year performance period and a four -year vesting period, which generally starts in the first quarter following the performance period).
We estimate the fair value of options granted using the Black-Scholes option-pricing model, as further described in Note 17 (“Stock-Based Compensation”). Employee stock options typically become exercisable at the rate of 25 % per year, beginning one year after the grant date. Options expire no later than 10 years after their grant date. We recognize stock-based compensation expense for stock options with graded vesting using an accelerated method of amortization.
We use shares repurchased under our annual capital plan submitted to our regulators (treasury shares) for share issuances under all stock-based compensation programs.

Income Taxes

Deferred tax assets and liabilities are determined based on temporary differences between financial statement asset and liability amounts and their respective tax bases, and are measured using enacted tax laws and rates that are expected to apply in the periods in which the deferred tax assets or liabilities are expected to be realized. Deferred tax assets are also recorded for any tax attributes, such as tax credit and net operating loss carryforwards. The net balance of deferred tax assets and liabilities is reported in “Accrued income and other assets” or “Accrued expense and other liabilities” in the consolidated balance sheets, as appropriate. Subsequent changes in the tax laws require adjustment to these assets and liabilities with the cumulative effect included in the provision for income taxes for the period in which the change is enacted. A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it is more-likely-than-not that some portion or all of the deferred tax asset will not be realized.

Earnings Per Share

Basic net income per common share is calculated using the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each share of common stock and participating securities according to dividends declared (distributed earnings) and participation rights in undistributed earnings. Distributed and undistributed earnings are allocated between common and participating security shareholders based on their respective rights to receive dividends. Nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are considered participating securities (e.g., nonvested service-based restricted stock units). Undistributed net losses are not allocated to nonvested restricted shareholders, as these shareholders do not have a contractual obligation to fund the incurred losses. Net income attributable to common shares is then divided by the weighted-average number of common shares outstanding during the period.

Diluted net income per common share is calculated using the more dilutive of either the treasury method or the two-class method. The dilutive calculation considers the potential dilutive effect of common stock equivalents determined under the treasury stock method. Common stock equivalents include stock options and service- and performance-based restricted stock and stock units granted under our stock plans. Net income attributable to common shares is then divided by the total of weighted-average number of common shares and common stock equivalents outstanding during the period.


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Accounting Guidance Adopted in 2020
Measurement of Credit Losses on Financial Instruments (ASU 2016-13, ASU 2018-19, ASU 2019-04, ASU
2019-05, ASU 2019-11, ASU 2020-02, ASU 2020-03)
On January 1, 2020, we adopted ASU 2016-13, Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred-loss methodology that recognized losses when a probable threshold was met with an expected-loss methodology, specifically, recognizing current expected credit losses (CECL) for the remaining life of the asset at the time of origination or acquisition. The CECL methodology applies to loans, debt securities, and other financial assets and net investment in leases measured at amortized cost. It also applies to off-balance sheet credit exposures (loan commitments, standby letters of credit, financial guarantees, and other similar instruments). Assets in the scope of ASC 326 are presented at the net amount expected to be collected after deducting the allowance for credit losses from the amortized cost basis of the assets. ASC 326 also requires credit losses relating to available-for-sale debt securities that management does not intend
to sell or believes that it is more likely than not they will be required to sell to be recorded through an allowance rather than a reduction of the carrying amount.
In accordance with ASC 326, we did not reassess whether recognized purchased credit impaired loans met the criteria of a PCD loan and whether modifications to individual acquired loans accounted for in pools were TDRs as of the date of adoption. At adoption, we elected to not maintain the pools of loans previously accounted for under Subtopic 310-30.
The prospective application resulted in a $ 4 million adjustment to the amortized cost basis of PCD loans to reflect the addition to the allowance for loans and leases as of January 1, 2020. After the adjustment for the allowance for the loans and leases, the noncredit discount of $ 15 million is being accreted to interest income using the interest method based on the effective interest rate determined after the adjustment from credit losses as of January 1, 2020.
The ASU requires use of a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Results for reporting periods beginning after January 1, 2020, are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. We posted an adjusting entry decreasing retained earnings as of January 1, 2020, by $ 230 million, net of deferred taxes of $ 71 million, for the cumulative effect of adopting ASC 326. The main drivers of the adjustment to retained earnings are summarized in the following table.
Pre-ASC 326 Adoption Impact of ASC 326 Adoption As Reported Under ASC 326
in millions December 31, 2019 January 1, 2020
Allowance for credit losses
Commercial
Commercial and industrial $ 551 $ ( 141 ) $ 410
Real estate — commercial mortgage 143 16 159
Real estate — construction 22 ( 7 ) 15
Commercial lease financing 35 8 43
Total commercial loans 751 ( 124 ) 627
Consumer
Real estate — residential mortgage 7 77 84
Home equity loans 31 147 178
Consumer direct loans 34 63 97
Credit cards 47 35 82
Consumer indirect loans 30 6 36
Total consumer loans 149 328 477
Total ALLL — continuing operations 900 204 1,104
Discontinued operations 10 31 41
Total ALLL 910 235 1,145
Accrued expense and other liabilities 75 70 145
Total allowance for credit losses $ 985 $ 305 $ 1,290

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Simplifying the Test for Goodwill Impairment (ASU 2017-04)
On January 1, 2020, we adopted ASU 2017-04. The ASU amends ASC Topic 350, Intangibles - Goodwill and Other
and eliminates the second step of the test for goodwill impairment.

Under the new accounting guidance, the quantitative analysis requires the estimated fair value of each reporting unit to be compared to its carrying amount, including goodwill. If the estimated fair value of the reporting unit is less than its carrying value, an impairment charge would be recorded for the excess, not to exceed the amount of goodwill allocated to the reporting unit. The adoption of this accounting guidance was applied prospectively and did not affect our financial condition or results of operations. See Note 12 (“Goodwill and Other Intangible Assets”) for additional information.
Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial
Reporting (ASU 2020-04)

We adopted ASU 2020-04 on April 1, 2020. The amendments provide optional expedients and exceptions for certain contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of rate reform. The guidance is effective from the date of issuance until December 31, 2022. The guidance permits Key not to apply modification accounting or remeasure lease payments in lease contracts if the changes to the contract are related to the discontinuation of the reference rate. If certain criteria are met, the amendments also allow exceptions to the dedesignation criteria of the hedging relationship and the assessment of hedge effectiveness during the transition period. It also allows Key to make a one time election to sell, transfer, or both sell and transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and that are classified as held to maturity before January 1, 2020. This one time election may be made at any time after March 12, 2020, but no later than December 31, 2022. Key has not made a determination on whether it will make this election. At the time of adoption, the guidance did not have a significant impact on Key’s
financial condition and results of operations. In January 2021, ASU 2021-01 was issued by the FASB and clarifies that certain exceptions in reference rate reform apply to derivatives that are affected by the discounting transition. We will continue to assess the impact as the reference rate transition occurs over the next two years.
















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Accounting Guidance Adopted in 2021
Standard Date of Adoption Description Effect on Financial Statements or Other Significant Matters
ASU 2019-12, Simplifying the
Accounting for
Income Taxes 		January 1, 2021

This ASU simplifies the accounting for income taxes by removing certain exceptions to the existing guidance, such as exceptions related to the incremental approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period when a
year-to-date loss exceeds the anticipated loss, and the recognition of deferred tax liabilities when a foreign subsidiary becomes an equity method investment and when a foreign equity method investment becomes a subsidiary.

Along with general improvements, it adds simplifications related to franchise taxes, the tax basis of goodwill, and the method for recognizing an enacted change in tax laws. The guidance also specifies that an entity is
not required to allocate the consolidated amount of certain tax expense to a legal entity not subject to tax in its own separate financial statements.

The guidance should be applied on either a retrospective, modified retrospective, or prospective basis depending on the amendment. 		Key adopted this guidance on January 1, 2021 using the transition guidance prescribed by amendment. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.
ASU 2020-01,
Clarifying the
Interactions
between Topic
321,Investments
—Equity
Securities;
Topic 323,
Investments—
Equity Method
and Joint
Ventures; and
Topic 815,
Derivatives and
Hedging 		January 1, 2021
This guidance clarifies that when applying the measurement alternative in Topic 321, companies should consider certain observable transactions that require the application or discontinuance of the equity method under Topic 323.

It also clarifies that companies should not consider whether the underlying securities in certain forward contracts and purchased options would be accounted for under the equity method or fair value option when determining the method of accounting for those contracts.

This guidance should be applied on a prospective basis. 		Key adopted this guidance on January 1, 2021 on a prospective basis. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.
ASU 2020-08,
Codification
Improvements to
Subtopic 310-20,
Receivables—
Nonrefundable
Fees and Other
Costs 		January 1, 2021 This ASU clarifies that at each reporting period an entity should reevaluate whether a callable debt security is within the scope of ASC 310, which says that to the extent the amortized cost basis of an individual callable debt security exceeds the amount repayable by the
issuer at the earliest call date, the premium shall be amortized to the earliest call date, unless prepayment guidance is applied.

This guidance should be applied on a prospective basis. 		Key adopted this guidance on January 1, 2021 on a prospective basis. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.
ASU 2021-01, Reference Rate Reform (Topic 848) January 1, 2021 The ASU clarifies that certain optional expedients and exceptions related to contracts modified as a result of reference rate reform and hedge accounting apply to derivatives affected by the discounting transition, such as those that use an interest rate for margining, discounting, or contract price alignment.

The guidance may be applied on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020,

Alternatively, it may be applied on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, until the financial statements are available to be issued. 		Key adopted this guidance on January 1, 2021 on a prospective basis and will assess the impact in conjunction with the reference rate transition as it occurs over the next two years.

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2. Earnings Per Common Share

Basic earnings per share is the amount of earnings (adjusted for dividends declared on our preferred stock) available to each Common Share outstanding during the reporting periods. Diluted earnings per share is the amount of earnings available to each Common Share outstanding during the reporting periods adjusted to include the effects of potentially dilutive Common Shares. Potentially dilutive Common Shares include stock options and other stock-based awards. Potentially dilutive Common Shares are excluded from the computation of diluted earnings per share in the periods where the effect would be antidilutive.

Our basic and diluted earnings per Common Share are calculated as follows:
Year ended December 31,
dollars in millions, except per share amounts 2020 2019 2018
EARNINGS
Income (loss) from continuing operations $ 1,329 $ 1,708 $ 1,859
Less: Net income (loss) attributable to noncontrolling interests — — —
Income (loss) from continuing operations attributable to Key 1,329 1,708 1,859
Less: Dividends on preferred stock 106 97 66
Income (loss) from continuing operations attributable to Key common shareholders 1,223 1,611 1,793
Income (loss) from discontinued operations, net of taxes 14 9 7
Net income (loss) attributable to Key common shareholders $ 1,237 $ 1,620 $ 1,800
WEIGHTED-AVERAGE COMMON SHARES
Weighted-average Common Shares outstanding (000) 967,783 992,091 1,040,890
Effect of common share options and other stock awards 7,024 10,163 13,792
Weighted-average common shares and potential Common Shares outstanding (000) (a)
974,807 1,002,254 1,054,682
EARNINGS PER COMMON SHARE
Income (loss) from continuing operations attributable to Key common shareholders $ 1.26 $ 1.62 $ 1.72
Income (loss) from discontinued operations, net of taxes .01 .01 .01
Net income (loss) attributable to Key common shareholders (b)
1.28 1.63 1.73
Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution 1.26 1.61 1.70
Income (loss) from discontinued operations, net of taxes .01 .01 .01
Net income (loss) attributable to Key common shareholders — assuming dilution (b)
1.27 1.62 1.71
(a) Assumes conversion of Common Share options and other stock awards and/or convertible preferred stock, as applicable.
(b) EPS may not foot due to rounding.
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3. Restrictions on Cash, Dividends, and Lending Activities
Federal law requires a depository institution to maintain a prescribed amount of cash or deposit reserve balances with its Federal Reserve Bank. KeyBank maintained average reserve balances aggregating $ 97 million in 2020 to fulfill these requirements while they were in effect. As announced on March 15, 2020, the Federal Reserve Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.
Capital distributions from KeyBank and other subsidiaries are our principal source of cash flows for paying dividends on our common and preferred shares, servicing our debt, and financing corporate operations. Federal banking law limits the amount of capital distributions that a bank can make to its holding company without prior regulatory approval. A national bank’s dividend-paying capacity is affected by several factors, including net profits (as defined by statute) for the previous two calendar years and for the current year, up to the date the dividend is declared.
During 2020, KeyBank paid $ 1.3 billion in dividends to KeyCorp. At January 1, 2021, KeyBank had regulatory capacity to pay $ 720 million in dividends to KeyCorp without prior regulatory approval. At December 31, 2020, KeyCorp held $ 3.8 billion in cash and short-term investments, which can be used to pay dividends to shareholders, service debt, and finance corporate operations.
4. Loan Portfolio
Loan Portfolio by Portfolio Segment and Class of Financing Receivable (a)
December 31,
in millions 2020 2019
Commercial and industrial (a)
$ 52,907 $ 48,295
Commercial real estate:
Commercial mortgage 12,687 13,491
Construction 1,987 1,558
Total commercial real estate loans 14,674 15,049
Commercial lease financing (b)
4,399 4,688
Total commercial loans 71,980 68,032
Residential — prime loans:
Real estate — residential mortgage 9,298 7,023
Home equity loans 9,360 10,274
Total residential — prime loans 18,658 17,297
Consumer direct loans 4,714 3,513
Credit cards 989 1,130
Consumer indirect loans 4,844 4,674
Total consumer loans 29,205 26,614
Total loans (c)
$ 101,185 $ 94,646
(a) Accrued interest of $ 241 million and $ 244 million at December 31, 2020, and December 31, 2019, respectively, is presented in "Accrued income and other assets" on the Consolidated Balance Sheets and is excluded from the amortized cost basis disclosed in this table.
(b) Loan balances include $ 127 million and $ 144 million of commercial credit card balances at December 31, 2020, and December 31, 2019, respectively.
(c) Commercial lease financing includes receivables of $ 23 million and $ 15 million held as collateral for a secured borrowing at December 31, 2020, and December 31, 2019, respectively. Principal reductions are based on the cash payments received from these related receivables. Additional information pertaining to this secured borrowing is included in Note 20 (“Long-Term Debt”).
(d) Total loans exclude loans in the amount of $ 710 million at December 31, 2020, and $ 865 million at December 31, 2019, related to the discontinued operations of the education lending business.
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5. Asset Quality
ALLL

We estimate the appropriate level of the ALLL on at least a quarterly basis. The methodology is described in Note 1 ("Basis of Presentation and Accounting Policies") under the heading "Allowance for Loan and Lease Losses" of this report.

The ALLL at December 31, 2020, represents our current estimate of lifetime credit losses inherent in the loan portfolio at that date. The changes in the ALLL by loan category for the periods indicated are as follows:

Twelve months ended December 31, 2020:
in millions December 31, 2019 Impact of ASC 326 Adoption January 1, 2020 Provision Charge-offs Recoveries December 31, 2020
Commercial and Industrial $ 551 $ ( 141 ) $ 410 $ 585 $ ( 351 ) $ 34 $ 678
Commercial real estate:
Real estate — commercial mortgage 143 16 159 184 ( 19 ) 3 327
Real estate — construction 22 ( 7 ) 15 32 — — 47
Total commercial real estate loans 165 9 174 216 ( 19 ) 3 374
Commercial lease financing 35 8 43 38 ( 35 ) 1 47
Total commercial loans 751 ( 124 ) 627 839 ( 405 ) 38 1,099
Real estate — residential mortgage 7 77 84 19 ( 2 ) 1 102
Home equity loans 31 147 178 ( 3 ) ( 11 ) 7 171
Consumer direct loans 34 63 97 61 ( 37 ) 7 128
Credit cards 47 35 82 36 ( 39 ) 8 87
Consumer indirect loans 30 6 36 13 ( 28 ) 18 39
Total consumer loans 149 328 477 126 ( 117 ) 41 527
Total ALLL — continuing operations 900 204 1,104 965
(a)
( 522 ) 79 1,626
Discontinued operations 10 31 41 ( 5 ) ( 5 ) 5 36
Total ALLL — including discontinued operations $ 910 $ 235 $ 1,145 $ 960 $ ( 527 ) $ 84 $ 1,662
(a) Excludes a provision for losses on lending-related commitments of $ 56 million.

Twelve months ended December 31, 2019 :
in millions December 31, 2018 Provision Charge-offs Recoveries December 31, 2019
Commercial and Industrial $ 532 $ 311 $ ( 319 ) $ 27 $ 551
Commercial real estate:
Real estate — commercial mortgage 142 7 ( 8 ) 2 143
Real estate — construction 33 ( 6 ) ( 5 ) — 22
Total commercial real estate loans 175 1 ( 13 ) 2 165
Commercial lease financing 36 20 ( 26 ) 5 35
Total commercial loans 743 332 ( 358 ) 34 751
Real estate — residential mortgage 7 1 ( 3 ) 2 7
Home equity loans 35 7 ( 19 ) 8 31
Consumer direct loans 30 38 ( 41 ) 7 34
Credit cards 48 36 ( 44 ) 7 47
Consumer indirect loans 20 27 ( 34 ) 17 30
Total consumer loans 140 109 ( 141 ) 41 149
Total ALLL — continuing operations 883 441
(a) (b)
( 499 )
(b)
75 900
Discontinued operations 14 3 ( 12 ) 5 10
Total ALLL — including discontinued operations $ 897 $ 444 $ ( 511 ) $ 80 $ 910
(a) Excludes a provision for losses on lending-related commitments of $ 4 million.
(b) Includes the realization of a $ 139 million loss related to a previously disclosed fraud incident.
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Twelve months ended December 31, 2018
in millions December 31, 2017 Provision Charge-offs Recoveries December 31, 2018
Commercial and industrial $ 529 $ 125 $ ( 159 ) $ 37 $ 532
Real estate — commercial mortgage 133 27 ( 21 ) 3 142
Real estate — construction 30 1 — 2 33
Commercial lease financing 43 ( 2 ) ( 10 ) 5 36
Total commercial loans 735 151 ( 190 ) 47 743
Real estate — residential mortgage 7 1 ( 3 ) 2 7
Home equity loans 43 2 ( 21 ) 11 35
Consumer direct loans 28 31 ( 36 ) 7 30
Credit cards 44 41 ( 44 ) 7 48
Consumer indirect loans 20 14 ( 30 ) 16 20
Total consumer loans 142 89 ( 134 ) 43 140
Total ALLL — continuing operations 877 240
(a)
( 324 ) 90 883
Discontinued operations 16 8 ( 15 ) 5 14
Total ALLL — including discontinued operations $ 893 $ 248 $ ( 339 ) $ 95 $ 897
(a) Excludes a provision for losses on lending-related commitments of $ 6 million.

As described in Note 1 ("Basis of Presentation and Accounting Policies"), we estimate the ALLL using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. In our estimation of expected credit losses, we use a two year reasonable and supportable period across all products. Following this two year period in which supportable forecasts can be generated, for all modeled loan portfolios, we revert expected credit losses to a level that is consistent with our historical information by reverting the macroeconomic variables (model inputs) to their long run average. We revert to historical loss rates for less complex estimation methods for smaller portfolios. A 20 year fixed length look back period is used to calculate the long run average of the macroeconomic variables. A four quarter reversion period is used where the macroeconomic variables linearly revert to their long run average following the two year reasonable and supportable period.

We develop our reasonable and supportable forecasts using relevant data including, but not limited to, changes in economic output, unemployment rates, property values, and other factors associated with the credit losses on financial assets. Some macroeconomic variables apply to all portfolio segments, while others are more portfolio specific. The following table discloses key macroeconomic variables for each loan portfolio.
Segment Portfolio
Key Macroeconomic Variables (a)
Commercial Commercial and industrial BBB corporate bond rate (spread), GDP, industrial production, and unemployment rate
Commercial real estate BBB corporate bond rate (spread), property and real estate price indices, and unemployment rate
Commercial lease financing BBB corporate bond rate (spread), GDP, and unemployment rate
Consumer Real estate — residential mortgage GDP, home price index, unemployment rate, and 30 year mortgage rate
Home equity Home price index, unemployment rate, and 30 year mortgage rate
Consumer direct Unemployment rate and U.S. household income
Consumer indirect New vehicle sales, Manheim used vehicle value index, and unemployment rate
Credit cards Unemployment rate and U.S. household income
Discontinued operations Unemployment rate
(a) Variables include all transformations and interactions with other risk drivers. Additionally, variables may have varying impacts at different points in the economic cycle.

In addition to macroeconomic drivers, portfolio attributes such as remaining term, outstanding balance, risk ratings, FICO, LTV, and delinquency also drive ALLL changes. Our ALLL models were designed to capture the correlation between economic and portfolio changes. As such, evaluating shifts in individual portfolio attributes and macroeconomic variables in isolation may not be indicative of past or future performance.

Economic Outlook

As of December 31, 2020, the COVID-19 pandemic has continued to create economic stress and uncertainty in the U.S. and globally. We utilized the Moody’s November 2020 Consensus forecast to estimate our expected credit losses as of December 31, 2020. This forecast considered the global economic impact from the ongoing pandemic, as well as the potential United States' fiscal response. We considered all available information at year end, including the December 2020 fiscal stimulus package and the rollout of the COVID vaccines and determined the forecast to be a reasonable view of the outlook for the global economy.
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The baseline scenario reflects moderate economic growth over the next two years in markets in which we operate. U.S. GDP continues to rebound from the unprecedented decline in the second quarter of 2020 with a 3% annualized growth rate forecast for the fourth quarter of 2020. GDP continues to grow throughout 2021, returning to pre-pandemic levels by the fourth quarter of 2021. The national unemployment rate forecast is 7.2% in the fourth quarter of 2020, declining to 6.3% by the fourth quarter of 2021.

To the extent we identify credit risk considerations that are not captured by the third-party economic forecast, we address the risk through management’s qualitative adjustments to the ALLL.

As a result of the unprecedented economic uncertainty caused by the COVID-19 pandemic, our future loss estimates may vary considerably from our December 31, 2020, assumptions.

Commercial Loan Portfolio

The ALLL from continuing operations for the commercial segment decreased by $ 124 million, or 16.5 %, from December 31, 2019 to January 1, 2020, with the adoption of ASU 2016-13, Financial Instruments - Credit Losses (ASC 326). The commercial ALLL increased by $ 472 million, or 75.3 %, from January 1, 2020, through December 31, 2020, driven by updated economic forecasts that capture deterioration triggered by the global COVID-19 pandemic .

The primary changes to the economic forecast included higher unemployment and decreased GDP and commercial real estate price indices, which contributed to the ALLL increase for the overall commercial segment. Negative risk rating migration and increased criticized assets during the year also contributed to increases in ALLL levels for the commercial segment.

As of December 31, 2020, we concluded that no ALLL is necessary for $ 6.7 billion in outstanding PPP loans as they are 100% guaranteed by the SBA.

Consumer Loan Portfolio

The ALLL from continuing operations for the consumer segment increased by $ 328 million, or 220 %, from December 31, 2019 to January 1, 2020, with the adoption of ASU 2016-13, Financial Instruments - Credit Losses (ASC 326). The consumer ALLL increased $ 50 million, or 10.5 %, from January 1, 2020 through December 31, 2020, largely driven by updated economic forecasts that capture deterioration triggered by the global COVID-19 pandemic.

The most meaningful economic forecast change contributing to the increase in reserves since January 1, 2020 is deterioration in the unemployment rate outlook, which impacts all consumer segments. As it relates to the changes in the ALLL due to portfolio factors, shifts are largely driven by attrition activity, targeted portfolio growth and overall strong credit performance. The ALLL results reflect incremental credit risk considerations as a result of the economic stress and related borrower assistance programs, which are addressed through qualitative adjustments.

Credit Risk Profile

The prevalent risk characteristic for both commercial and consumer loans is the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms. Evaluation of this risk is stratified and monitored by the loan risk rating grades assigned for the commercial loan portfolios and the refreshed FICO score assigned for the consumer loan portfolios. The internal risk grades assigned to loans follow our definitions of Pass and Criticized, which are consistent with published definitions of regulatory risk classifications. Loans with a pass rating represent those loans not classified on our rating scale for problem credits, as minimal credit risk has been identified. Criticized loans are those loans that either have a potential weakness deserving management's close attention or have a well-defined weakness that may put full collection of contractual cash flows at risk. Borrower FICO scores provide information about the credit quality of our consumer loan portfolio as they provide an indication as to the likelihood that a debtor will repay its debts. The scores are obtained from a nationally recognized consumer rating agency and are presented in the tables below at the dates indicated.


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Most extensions of credit are subject to loan scoring. Loan grades are assigned at the time of origination, verified by credit risk management, and periodically re-evaluated thereafter. This risk rating methodology blends our judgment with quantitative modeling. Commercial loans generally are assigned two internal risk ratings. The first rating reflects the probability that the borrower will default on an obligation; the second rating reflects expected recovery rates on the credit facility. Default probability is determined based on, among other factors, the financial strength of the borrower, an assessment of the borrower’s management, the borrower’s competitive position within its industry sector, and our view of industry risk in the context of the general economic outlook. Types of exposure, transaction structure, and collateral, including credit risk mitigants, affect the expected recovery assessment.

Commercial Credit Exposure
Credit Risk Profile by Creditworthiness Category and Vintage (a)
As of December 31, 2020 Term Loans Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans Amortized Cost Basis
Amortized Cost Basis by Origination Year and Internal Risk Rating
in millions 2020 2019 2018 2017 2016 Prior Total
Commercial and Industrial
Risk Rating:
Pass $ 13,100 $ 5,487 $ 4,040 $ 2,617 $ 1,967 $ 2,709 $ 19,832 $ 118 $ 49,870
Criticized (Accruing) 66 198 174 236 150 279 1,527 22 2,652
Criticized (Nonaccruing) 8 27 71 28 17 7 226 1 385
Total commercial and industrial 13,174 5,712 4,285 2,881 2,134 2,995 21,585 141 52,907
Real estate — commercial mortgage
Risk Rating:
Pass 1,591 2,937 1,737 867 765 3,027 885 43 11,852
Criticized (Accruing) 12 142 81 145 72 255 22 2 731
Criticized (Nonaccruing) — 1 4 4 2 88 5 — 104
Total real estate — commercial mortgage
1,603 3,080 1,822 1,016 839 3,370 912 45 12,687
Real estate — construction
Risk Rating:
Pass 367 764 510 188 27 22 31 5 1,914
Criticized (Accruing) — 14 38 18 — 2 1 — 73
Criticized (Nonaccruing) — — — — — — — —
Total real estate — construction 367 778 548 206 27 24 32 5 1,987
Commercial lease financing
Risk Rating:
Pass 1,076 1,050 534 504 228 901 — — 4,293
Criticized (Accruing) 10 35 15 26 7 4 — — 97
Criticized (Nonaccruing) — 2 2 2 2 1 — — 9
Total commercial lease financing 1,086 1,087 551 532 237 906 — 4,399
Total commercial loans $ 16,230 $ 10,657 $ 7,206 $ 4,635 $ 3,237 $ 7,295 $ 22,529 $ 191 $ 71,980
(a) Accrued interest of $ 140 million, presented in Other Assets on the Consolidated Balance Sheets, was excluded from the amortized cost basis disclosed in this table.


127

Consumer Credit Exposure
Credit Risk Profile by FICO Score and Vintage (a)
As of December 31, 2020 Term Loans Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans Amortized Cost Basis
Amortized Cost Basis by Origination Year and FICO Score
in millions 2020 2019 2018 2017 2016 Prior Total
Real estate — residential mortgage
FICO Score:
750 and above $ 3,595 $ 1,620 $ 194 $ 254 $ 537 $ 1,211 — — $ 7,411
660 to 749 710 284 76 48 100 332 — — 1,550
Less than 660 16 28 21 10 26 170 — — 271
No Score 1 2 2 7 2 52 — — 66
Total real estate — residential mortgage 4,322 1,934 293 319 665 1,765 — — 9,298
Home equity loans
FICO Score:
750 and above 1,043 404 168 202 190 839 $ 2,689 $ 590 6,125
660 to 749 385 198 82 77 69 253 1,237 206 2,507
Less than 660 27 30 18 20 20 113 426 61 715
No Score 2 2 1 — — 2 5 1 13
Total home equity loans 1,457 634 269 299 279 1,207 4,357 858 9,360
Consumer direct loans
FICO Score:
750 and above 1,840 883 115 32 16 57 119 — 3,062
660 to 749 479 268 80 22 14 33 254 1 1,151
Less than 660 23 37 21 8 5 10 81 — 185
No Score 65 35 21 21 10 11 153 — 316
Total consumer direct loans 2,407 1,223 237 83 45 111 607 1 4,714
Credit cards
FICO Score:
750 and above — — — — — — 488 — 488
660 to 749 — — — — — — 407 — 407
Less than 660 — — — — — — 93 — 93
No Score — — — — — — 1 — 1
Total credit cards — — — — — — 989 — 989
Consumer indirect loans
FICO Score:
750 and above 1,092 924 369 188 69 66 — — 2,708
660 to 749 653 558 232 97 36 47 — — 1,623
Less than 660 143 163 99 54 25 28 — — 512
No Score 1 — — — — — — — 1
Total consumer indirect loans 1,889 1,645 700 339 130 141 — — 4,844
Total consumer loans $ 10,075 $ 5,436 $ 1,499 $ 1,040 $ 1,119 $ 3,224 $ 5,953 $ 859 $ 29,205
(a) Accrued interest of $ 101 million, presented in Other Assets on the Consolidated Balance Sheets, was excluded from the amortized cost basis disclosed in this table.

Nonperforming and Past Due Loans

Our policies for determining past due loans, placing loans on nonaccrual, applying payments on nonaccrual loans, and resuming accrual of interest for our commercial and consumer loan portfolios are disclosed in Note 1 (”Basis of Presentation and Accounting Policies”) and Note 1 (“Summary of Significant Accounting Policies”) under the heading “Nonperforming Loans”.

Under the CARES Act as well as banking regulator interagency guidance, certain loan modifications to borrowers experiencing financial distress as a result of the economic impacts created by the COVID-19 pandemic may not be required to be reported as past due and nonperforming. For COVID-19 related loan modifications which occurred from March 1, 2020, through December 31, 2020, and met the loan modification criteria under either the CARES Act or the criteria specified by the regulatory agencies, we have elected to re-age to current status all commercial loans and consumer loans that are not secured by real-estate and freeze the delinquency status of consumer real estate secured loans as of the modification or forbearance grant date. At December 31, 2020, the portfolio loans and leases that have received a payment deferral or forbearance as part of our COVID-19 hardship relief programs totaled $ 575 million, of which $ 506 million of loan modifications and forbearances made under the criteria of either the CARES Act, banking regulator interagency guidance, or short-term forbearance policies were not reported as nonperforming.

The following aging analysis of past due and current loans as of December 31, 2020, and December 31, 2019, provides further information regarding Key’s credit exposure.

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Aging Analysis of Loan Portfolio (a)
December 31, 2020 Current
30-59
Days Past
Due (b)
60-89
Days Past
Due (b)
90 and
Greater
Days Past
Due (b)
Non-performing
Loans (c)
Total Past
Due and
Non-performing
Loans (c)
Total
Loans (d)
in millions
LOAN TYPE
Commercial and industrial $ 52,396 $ 36 $ 50 $ 40 $ 385 $ 511 $ 52,907
Commercial real estate:
Commercial mortgage 12,548 9 5 21 104 139 12,687
Construction 1,986 — — 1 — 1 1,987
Total commercial real estate loans 14,534 9 5 22 104 140 14,674
Commercial lease financing 4,369 21 1 — 8 30 4,399
Total commercial loans $ 71,299 $ 66 $ 56 $ 62 $ 497 $ 681 $ 71,980
Real estate — residential mortgage $ 9,173 $ 11 $ 3 $ 1 $ 110 $ 125 $ 9,298
Home equity loans 9,143 34 20 9 154 217 9,360
Consumer direct loans 4,694 7 4 4 5 20 4,714
Credit cards 972 5 3 7 2 17 989
Consumer indirect loans 4,792 25 7 3 17 52 4,844
Total consumer loans $ 28,774 $ 82 $ 37 $ 24 $ 288 $ 431 $ 29,205
Total loans $ 100,073 $ 148 $ 93 $ 86 $ 785 $ 1,112 $ 101,185
(a) Amounts in table represent amortized cost and exclude loans held for sale.
(b) Accrued interest of $ 241 million presented in “other assets” on the Consolidated Balance Sheets is excluded from the amortized cost basis disclosed in this table.
(c) PCI loans meeting nonperforming criteria were historically excluded from Key's nonperforming disclosures. As a result of CECL implementation on January 1, 2020, PCI loans became PCD loans. PCD loans that met the definition of nonperforming are now included in nonperforming disclosures.
(d) Net of unearned income, net of deferred fees and costs, and unamortized discounts and premiums.
December 31, 2019 Current
30-59
Days Past
Due (b)
60-89
Days Past
Due (b)
90 and
Greater
Days Past
Due (b)
Non-performing
Loans
Total Past
Due and
Non-performing
Loans
Purchased
Credit
Impaired
Total
Loans
in millions
LOAN TYPE
Commercial and industrial $ 47,768 $ 110 $ 52 $ 53 $ 264 $ 479 48 $ 48,295
Commercial real estate:
Commercial mortgage 13,258 8 5 13 83 109 124 13,491
Construction 1,551 3 — 1 2 6 1 1,558
Total commercial real estate loans 14,809 11 5 14 85 115 125 15,049
Commercial lease financing 4,647 22 11 2 6 41 — 4,688
Total commercial loans $ 67,224 $ 143 $ 68 $ 69 $ 355 $ 635 173 $ 68,032
Real estate — residential mortgage $ 6,705 $ 7 $ 5 $ 1 $ 48 $ 61 $ 257 $ 7,023
Home equity loans 10,071 30 10 5 145 190 13 10,274
Consumer direct loans 3,484 10 5 7 4 26 3 3,513
Credit cards 1,104 6 5 12 3 26 — 1,130
Consumer indirect loans 4,609 32 8 3 22 65 — 4,674
Total consumer loans $ 25,973 $ 85 $ 33 $ 28 $ 222 $ 368 $ 273 $ 26,614
Total loans $ 93,197 $ 228 $ 101 $ 97 $ 577 $ 1,003 $ 446 $ 94,646
(a) Amounts in table represent recorded investment and exclude loans held for sale. Recorded investment represents the principal amount of the loan increased or decreased by net deferred loan fees and costs, and unamortized premium or discount, and reflects direct charge-offs.
(b) Past due loan amounts exclude PCI, even if contractually past due (or if we do not expect to collect principal or interest in full based on the original contractual terms), as we are currently accreting income over the remaining term of the loans.

At December 31, 2020, the carrying amount of our commercial nonperforming loans outstanding represented 70 % of their original contractual amount owed, total nonperforming loans outstanding represented 76 % of their original contractual amount owed, and nonperforming assets in total were carried at 83 % of their original contractual amount owed.

Nonperforming loans reduced expected interest income by $ 27 million, $ 31 million, and $ 30 million for each of the twelve months ended December 31, 2020, December 31, 2019, and December 31, 2018, respectively.

The amortized cost basis of nonperforming loans on nonaccrual status for which there is no related allowance for credit losses was $ 379 million at December 31, 2020.

129

Collateral-dependent Financial Assets

We classify financial assets as collateral-dependent when our borrower is experiencing financial difficulty, and we expect repayment to be provided substantially through the operation or sale of the collateral. Our commercial loans have collateral that includes cash, accounts receivable, inventory, commercial machinery, commercial properties, commercial real estate construction projects, and stock or ownership interests in the borrowing entity. When appropriate we also consider the enterprise value of the borrower as a repayment source for collateral-dependent loans. Our consumer loans have collateral that includes residential real estate, automobiles, boats, and RVs.

There were no significant changes in the extent to which collateral secures our collateral-dependent financial assets during 2020.

TDRs

We classify loan modifications as TDRs when a borrower is experiencing financial difficulties and we have granted a concession without commensurate financial, structural, or legal consideration. Our loan modifications are handled on a case-by-case basis and are negotiated to achieve mutually agreeable terms that maximize loan collectability and meet the borrower’s financial needs. Under the CARES Act as well as banking regulator interagency guidance, certain loan modifications to borrowers experiencing financial distress as a result of the economic impacts created by the COVID-19 pandemic may not be required to be treated as TDRs under U.S. GAAP.  We elected to suspend TDR accounting for $ 506 million of COVID-19 related loan modifications as of December 31, 2020, as such loan modifications met the criteria under either the CARES Act, banking regulator interagency guidance or are a short-term forbearance.

Commitments outstanding to lend additional funds to borrowers whose loan terms have been modified in TDRs were $ 1 million and $ 4 million at December 31, 2020, and December 31, 2019, respectively.

The consumer TDR other concession category in the table below primarily includes those borrowers’ debts that are discharged through Chapter 7 bankruptcy and have not been formally re-affirmed. At December 31, 2020, and December 31, 2019, the recorded investment of consumer residential mortgage loans in the process of foreclosure was approximately $ 92 million and $ 97 million, respectively.

The following table shows the post-modification outstanding recorded investment by concession type for our commercial and consumer accruing and nonaccruing TDRs that occurred during the periods indicated:
December 31,
in millions 2020 2019
Commercial loans:
Extension of Maturity Date $ 5 $ 11
Payment or Covenant Modification/Deferment 59 11
Bankruptcy Plan Modification — —
Increase in new commitment or new money — 8
Total $ 64 $ 30
Consumer loans:
Interest rate reduction $ 41 $ 14
Other 21 29
Total $ 62 $ 43
Total TDRs $ 126 $ 73

The following table summarizes the change in the post-modification outstanding recorded investment of our accruing and nonaccruing TDRs during the periods indicated:
December 31,
in millions 2020 2019
Balance at beginning of the period $ 347 $ 399
Additions 173 112
Payments ( 95 ) ( 145 )
Charge-offs ( 62 ) ( 19 )
Balance at end of period $ 363 $ 347
130

A further breakdown of TDRs included in nonperforming loans by loan category for the periods indicated are as follows:
December 31, 2020 December 31, 2019
Number
of Loans
Pre-modification
Outstanding
Recorded
Investment
Post-modification
Outstanding
Recorded
Investment
Number
of Loans 		Pre-modification
Outstanding
Recorded
Investment 		Post-modification
Outstanding
Recorded
Investment
dollars in millions
LOAN TYPE
Nonperforming:
Commercial and industrial 66 $ 136 $ 92 51 $ 72 $ 53
Commercial real estate:
Real estate — commercial mortgage 7 62 50 6 64 58
Total commercial real estate loans 7 62 50 6 64 58
Total commercial loans 73 198 142 57 136 111
Real estate — residential mortgage 258 35 34 181 13 11
Home equity loans 630 41 37 713 42 41
Consumer direct loans 212 3 3 172 2 2
Credit cards 356 2 2 368 2 2
Consumer indirect loans 861 15 11 1,131 19 16
Total consumer loans 2,317 96 87 2,565 78 72
Total nonperforming TDRs 2,390 294 229 2,622 214 183
Prior-year accruing: (a)
Commercial and industrial 3 5 — 6 30 25
Commercial real estate:
Real estate — commercial mortgage — — — 1 — —
Total commercial loans 3 5 — 7 30 25
Real estate — residential mortgage 485 37 31 493 37 31
Home equity loans 1,781 106 83 1,751 104 84
Consumer direct loans 163 4 3 139 4 3
Credit cards 536 3 1 486 3 1
Consumer indirect loans 775 29 16 714 33 20
Total consumer loans 3,740 179 134 3,583 181 139
Total prior-year accruing TDRs 3,743 184 134 3,590 211 164
Total TDRs 6,133 $ 478 $ 363 6,212 $ 425 $ 347
(a) All TDRs that were restructured prior to January 1, 2020, and January 1, 2019, are fully accruing.

Commercial loan TDRs are considered defaulted when principal and interest payments are 90 days past due. Consumer loan TDRs are considered defaulted when principal and interest payments are more than 60 days past due. During 2020, there were seven commercial loan TDRs and 212 consumer loan TDRs with a combined recorded investment of $ 10 million that experienced payment defaults after modifications resulting in TDR status during 2019. During 2019, there were no commercial loan TDRs and 356 consumer loan TDRs with a combined recorded investment of $ 8 million that experienced payment defaults after modifications resulting in TDR status during 2018.
Liability for Credit Losses on Off Balance Sheet Exposures

The liability for credit losses inherent in unfunded lending-related commitments, such as letters of credit and unfunded loan commitments, and certain financial guarantees is included in “accrued expense and other liabilities” on the balance sheet and is assessed a reserve under CECL.

Changes in the liability for credit losses on off balance sheet exposures are summarized as follows:
Twelve Months Ended December 31,
in millions 2020 2019
Balance at the end of the prior period $ 68 $ 64
Liability for credit losses on contingent guarantees at the end of the prior period 7 —
Cumulative effect from change in accounting principle (a), (b) 66 —
Balance at beginning of period 141 64
Provision (credit) for losses on off balance sheet exposures 56 4
Balance at end of period $ 197 $ 68
(a) The cumulative effect from change in accounting principle relates to the January 1, 2020, adoption of ASU 2016-13.
(b) Excludes $ 4 million related to the provision for other financial assets.
131

6. Fair Value Measurements
In accordance with GAAP, Key measures certain assets and liabilities at fair value. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants in our principal market. Additional information regarding our accounting policies for determining fair value is provided in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Fair Value Measurements.”
Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present assets and liabilities measured at fair value on a recurring basis at December 31, 2020, and December 31, 2019.
December 31, 2020 December 31, 2019
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
in millions
ASSETS MEASURED ON A RECURRING BASIS
Trading account assets:
U.S. Treasury, agencies and corporations — $ 633 — $ 633 — $ 843 — $ 843
States and political subdivisions — 24 — 24 — 30 — 30
Other mortgage-backed securities — 47 — 47 — 78 — 78
Other securities — 13 — 13 — 44 — 44
Total trading account securities — 717 — 717 — 995 — 995
Commercial loans — 18 — 18 — 45 — 45
Total trading account assets — 735 — 735 — 1,040 — 1,040
Securities available for sale:
U.S. Treasury, agencies and corporations — 1,000 — 1,000 — 334 — 334
States and political subdivisions — — — — — 4 — 4
Agency residential collateralized mortgage obligations — 14,273 — 14,273 — 12,783 — 12,783
Agency residential mortgage-backed securities — 2,164 — 2,164 — 1,714 — 1,714
Agency commercial mortgage-backed securities — 10,106 — 10,106 — 6,997 — 6,997
Other securities — — $ 13 13 — — $ 11 11
Total securities available for sale — 27,543 13 27,556 — 21,832 11 21,843
Other investments:
Principal investments:
Direct — — 1 1 — — 1 1
Indirect (measured at NAV) (a)
— — — 53 — — — 68
Total principal investments — — 1 54 — — 1 69
Equity investments:
Direct — — 13 13 — — 12 12
Direct (measured at NAV) (a)
— — — 7 — — — 1
Indirect (measured at NAV) (a)
— — — 7 — — — 8
Total equity investments — — 13 27 — — 12 21
Total other investments — — 14 81 — — 13 90
Loans, net of unearned income (residential) — — 11 11 — — 4 4
Loans held for sale (residential) — 264 — 264 — 140 — 140
Derivative assets:
Interest rate — 1,528 56 1,584 — 941 22 963
Foreign exchange $ 78 31 — 109 $ 49 $ 18 $ — $ 67
Commodity — 424 2 426 — 208 — 208
Credit — — 1 1 — — 1 1
Other — 26 32 58 — 9 5 14
Derivative assets 78 2,009 91 2,178 49 1,176 28 1,253
Netting adjustments (b)
— — — ( 380 ) — — — ( 473 )
Total derivative assets 78 2,009 91 1,798 49 1,176 28 780
Total assets on a recurring basis at fair value $ 78 $ 30,551 $ 129 $ 30,445 $ 49 $ 24,188 $ 56 $ 23,897
LIABILITIES MEASURED ON A RECURRING BASIS
Bank notes and other short-term borrowings:
Short positions $ 256 $ 503 — $ 759 $ 19 $ 686 — $ 705
Derivative liabilities:
Interest rate — 288 — 288 — 253 — 253
Foreign exchange 72 31 — 103 43 17 — 60
Commodity — 408 — 408 — 200 — 200
Credit — — $ 11 11 — 1 $ 9 10
Other — 16 — 16 — 10 — 10
Derivative liabilities 72 743 11 826 43 481 9 533
Netting adjustments (b)
— — — ( 675 ) — — — ( 335 )
Total derivative liabilities 72 743 11 151 43 481 9 198
Total liabilities on a recurring basis at fair value $ 328 $ 1,246 $ 11 $ 910 $ 62 $ 1,167 $ 9 $ 903
132

(a) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheet.
(b) Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The net basis takes into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related cash collateral. Total derivative assets and liabilities include these netting adjustments.
Qualitative Disclosures of Valuation Techniques
The following table describes the valuation techniques and significant inputs used to measure the classes of assets and liabilities reported at fair value on a recurring basis, as well as the classification of each within the valuation hierarchy.
Asset/liability class Valuation technique Valuation hierarchy classification(s)
Securities (includes trading account assets securities available for sale, and U.S. Treasury Bills classified as short-term investments)
Fair value of level 1 securities is determined by:
• Quoted market prices available in an active market for identical securities. This includes exchange-traded equity securities.
Fair value of level 2 securities is determined by:
• Pricing models (either by a third party pricing service or internally). Inputs include: yields, benchmark securities, bids, offers, actual trade data (i.e., spreads, credit ratings, and interest rates) for comparable assets, spread tables, matrices, high-grade scales, and option-adjusted spreads.
• Observable market prices of similar securities.
Fair value of level 3 securities is determined by:
• Internally developed valuation techniques, principally discounted cash flow methods (income approach).
• Revenue multiples of comparable public companies (market approach).

For level 3 securities, increases (decreases) in the discount rate and marketability discount used in the discounted cash flow models would have resulted in lower (higher) fair value measurements. Higher volatility factors would have further magnified changes in fair value.

The valuations provided by the third-party pricing service are based on observable market inputs, which include benchmark yields, reported trades, issuer spreads, benchmark securities, bids, offers, and reference data obtained from market research publications. Inputs used by the third-party pricing service in valuing CMOs and other mortgage-backed securities also include new issue data, monthly payment information, whole loan collateral performance, and “To Be Announced” prices. In valuations of securities issued by state and political subdivisions, inputs used by the third-party pricing service also include material event notices. We regularly validate the pricing methodologies of valuations derived from a third-party pricing service to ensure the fair value determination is consistent with applicable accounting guidance and that our assets are properly classified in the fair value hierarchy. To perform this validation, we:

• review documentation received from our third-party pricing service regarding the inputs used in its valuations and determine a level assessment for each category of securities;
• substantiate actual inputs used for a sample of securities by comparing the actual inputs used by our third-party pricing service to comparable inputs for similar securities; and
• substantiate the fair values determined for a sample of securities by comparing the fair values provided by our third-party pricing service to prices from other independent sources for the same and similar securities.

We analyze variances and conduct additional research with our third-party pricing service and take appropriate steps based on our findings.
Level 1, 2, and 3 (primarily Level 2)
Commercial loans (trading account assets)
Fair value is based on:
• Observable market price spreads for similar loans. Valuations reflect prices within the bid-ask spread that are most representative of fair value.
Level 2
Principal investments (direct)
Direct principal investments consist of equity and debt instruments of private companies made by our principal investing entities. Fair value is determined using:
• Operating performance and market multiples of comparable businesses
• Other unique facts and circumstances related to each individual investment
Direct principal investments are accounted for as investment companies in accordance with the applicable accounting guidance, whereby each investment is adjusted to fair value with any net realized or unrealized gain/loss recorded in the current period’s earnings.

We are in the process of winding down our direct principal investment portfolio. As of December 31, 2020, the balance is less than $1 million.
Level 3
133

Asset/liability class Valuation technique Valuation hierarchy classification(s)
Principal investments (indirect)
Indirect principal investments include primary and secondary investments in private equity funds engaged mainly in venture- and growth-oriented investing. These investments do not have readily determinable fair values and qualify for the practical expedient to estimate fair value based upon net asset value per share (or its equivalent, such as member units or an ownership interest in partners’ capital to which a proportionate share of net assets is attributed).
Indirect principal investments are also accounted for as investment companies, whereby each investment is adjusted to fair value with any net realized or unrealized gain/loss recorded in the current period’s earnings.

Under the provisions of the Volcker Rule, we are required to dispose or conform our indirect investments to the requirements of the statute by no later than July 21, 2022. As of December 31, 2020, we have not committed to a plan to sell these investments. Therefore, these investments continue to be valued using the net asset value per share methodology.
NAV

The following table presents the fair value of our direct and indirect principal investments and related unfunded commitments at December 31, 2020, as well as financial support provided for the years ended December 31, 2020, and December 31, 2019.
Financial support provided
Year ended December 31,
December 31, 2020 2020 2019
in millions Fair Value
Unfunded
Commitments
Funded
Commitments
Funded
Other
Funded
Commitments
Funded
Other
INVESTMENT TYPE
Direct investments $ 1 — — — — $ —
Indirect investments (a)
53 $ 16 $ 2 — $ 2 —
Total $ 54 $ 16 $ 2 — $ 2 $ —
(a) Our indirect investments consist of buyout funds, venture capital funds, and fund of funds. These investments are generally not redeemable. Instead, distributions are received through the liquidation of the underlying investments of the fund. An investment in any one of these funds typically can be sold only with the approval of the fund’s general partners. At December 31, 2020, no significant liquidation of the underlying investments has been communicated to Key. The purpose of funding our capital commitments to these investments is to allow the funds to make additional follow-on investments and pay fund expenses until the fund dissolves. We, and all other investors in the fund, are obligated to fund the full amount of our respective capital commitments to the fund based on our and their respective ownership percentages, as noted in the applicable Limited Partnership Agreement.

Asset/liability class Valuation technique Valuation hierarchy classification(s)
Other direct equity investments
Fair value is determined using:
• Discounted cash flows
• Operating performance and market/exit multiples of comparable businesses
• Other unique facts and circumstances related to each individual investment
For level 3 securities, increases in the discount rate applied in the discounted cash flow models would negatively affect the fair value. Increases in valuation multiples of comparable companies would positively affect the fair value. Level 2 investments reflect the price of recent investments, which is deemed representative of fair value.
Level 2 and 3
Other direct and indirect equity investments (NAV)
Certain direct investments do not have readily determinable fair values and qualify for the practical expedient in the accounting guidance that allows us to estimate fair value based upon net asset value per share.
NAV
134

Asset/liability class Valuation technique Valuation hierarchy classification(s)
Loans held for sale and held for investment (residential)
Residential mortgage loans held for sale are accounted for at fair value. Fair values are based on:
• Quoted market prices, where available
• Prices for other traded mortgage loans with similar characteristics
• Purchase commitments and bid information received from market participants
Prices are adjusted as necessary to include:
• The embedded servicing value in the loans
• The specific characteristics of certain loans that are priced based on the pricing of similar loans. (These adjustments represent unobservable inputs to the valuation but are not considered significant given the relative insensitivity of the value to changes in these inputs to the fair value of the loans.)
Residential loans held for investment: Certain residential loans held for sale contain salability exceptions that make them unable to be sold into the performing loan sales market. Loans in this category are transferred to the held to maturity loan portfolio and are included in “Loans, net of unearned income” on the balance sheet. This type of loan is classified as level 3 in the valuation hierarchy as transaction details regarding sales of this type of loan are often unavailable.
Fair value is based upon:
• Unobservable bid information from brokers and investors

Higher (lower) unobservable bid information would have resulted in higher (lower) fair value measurements.
Level 1, 2 and 3 (primarily level 2)
Derivatives
Exchange-traded derivatives are valued using quoted prices in active markets and, therefore, are classified as Level 1 instruments.

The majority of our derivative positions are Level 2 and are valued using internally developed models based on market convention and observable market inputs. These derivative contracts include interest rate swaps, certain options, floors, cross currency swaps, credit default swaps, and forward mortgage loan sale commitments. Significant inputs used in the valuation models include:
• LIBOR, SOFR and OIS curves, index pricing curves, foreign currency curves
• Volatility surfaces (a three-dimensional graph of implied volatility against strike price and maturity)
We have customized derivative instruments and risk participations that are classified as Level 3 instruments. These derivative positions are valued using internally developed models, with inputs consisting of available market data, including:

• Credit spreads and interest rates

The unobservable internally derived assumptions include:

• Loss given default

• Internal risk assessments of customers
The fair value represents an estimate of the amount that the risk participation counterparty would need to pay/receive as of the measurement date based on the probability of customer default on the swap transaction and the fair value of the underlying customer swap. Therefore, for sold risk participation agreements, a higher loss probability and a lower credit rating would negatively affect the fair value of the risk participations and a lower loss probability and higher credit rating would positively affect the fair value of the risk participations. (For purchased risk participation agreements, higher loss probabilities and lower credit ratings would positively affect the fair value.)
Level 1, 2, and 3 (primarily level 2)
135

Asset/liability class Valuation technique Valuation hierarchy classification(s)
Derivatives (continued)
We use interest rate lock commitments for our residential mortgage business, which are classified as Level 3 instruments. The significant components of the valuation model include:
• Interest rates observable in the market

• Investor supplied prices for similar securities

• The probability of the loan closing (i.e. the "pull-through" amount, a significant unobservable input). Increases (decreases) in the probability of the loan closing would have resulted in higher (lower) fair value measurements.
Valuation of residential mortgage forward sale commitments utilizes observable market prices of comparable commitments and mortgage securities (Level 2).

The fair values of our derivatives include a credit valuation adjustment related to both counterparty and our own creditworthiness. The credit component considers master netting and collateral agreements and is determined by the individual counterparty based on potential future exposures, expected recovery rates, and market-implied probabilities of default.
Level 1, 2, and 3 (primarily level 2)
Liability for short positions
This includes fixed income securities held by our broker dealer in its trading inventory. Fair value of level 1 securities is determined by:
• Quoted market prices available in an active market for identical securities
Fair value of level 2 securities is determined by:
• Observable market prices of similar securities
• Market activity, spreads, credit ratings and interest rates for each security type
Level 1 and 2
We also make liquidity valuation adjustments to the fair value of certain assets to reflect the uncertainty in the pricing and trading of the instruments when we are unable to observe recent market transactions for identical or similar instruments. Liquidity valuation adjustments are based on the following factors:
• the amount of time since the last relevant valuation;
• whether there is an actual trade or relevant external quote available at the measurement date; and
• volatility associated with the primary pricing components.


Changes in Level 3 Fair Value Measurements

The following table shows the change in the fair values of our Level 3 financial instruments measured at fair value on a recurring basis for the years ended December 31, 2020, and December 31, 2019.
in millions
Beginning
of Period
Balance
Gains (Losses) included in
comprehensive income
Gains
(Losses)
Included
in Earnings
Purchases Sales Settlements Transfers Other
Transfers
into
Level 3
Transfers
out of
Level 3
End of
Period
Balance
Unrealized
Gains
(Losses)
Included in
Earnings
Year ended December 31, 2020
Securities available for sale
Other securities $ 11 $ 2 —
— — — — — — $ 13 —
Other investments
Principal investments
Direct 1 — — — — — — — — 1 —
Equity investments
Direct 12 — $ 1
(c)
— — — — — — 13 $ 1
Loans held for sale (residential) — — — — $ ( 10 ) — $ 10 — — — —
Loans held for investment (residential) 4 — — — ( 2 ) — 9 — — 11 —
Derivative instruments (b)
Interest rate 22 — 19
(d)
$ 17 ( 10 ) — — $ 99
(e)
$ ( 91 )
(e)
56 —
Credit ( 8 ) — ( 2 )
(d)
1 ( 1 ) — — — — ( 10 ) —
Other (a)
5 — 7 — — — 20 — — 32 —
136

in millions
Beginning
of Period
Balance
Gains (Losses) included in comprehensive income
Gains
(Losses)
Included in
Earnings
Purchases Sales Settlements Transfers Other
Transfers
into
Level 3
Transfers
out of
Level 3
End of
Period
Balance
Unrealized
Gains
(Losses)
Included in
Earnings
Year ended December 31, 2019
Securities available for sale
Other securities $ 20 15 —
— — — — — $ ( 24 ) $ 11 —
Other investments
Principal investments
Direct 1 — — — — — — — — 1 —
Equity investments
Direct 7 — $ 4
(c)
— — — — $ 1 — 12 $ 4
Loans held for sale (residential) — — — — $ ( 1 ) — $ 1 — — — —
Loans held for investment (residential) 3 — — — — — 1 — — 4 —
Derivative instruments (b)
Interest rate 5 — 3
(d)
$ 2 ( 1 ) — — 21
(e)
( 8 )
(e)
22 —
Credit — — ( 8 )
(d)
— — $ — — — — ( 8 ) —
Other (a)
3 — — — — — $ 2 — — 5 —
(a) Amounts represent Level 3 interest rate lock commitments.
(b) Amounts represent Level 3 derivative assets less Level 3 derivative liabilities.
(c) Realized and unrealized gains and losses on principal investments are reported in “other income” on the income statement. Realized and unrealized losses on equity investments are reported in “other income” on the income statement.
(d) Realized and unrealized gains and losses on derivative instruments are reported in “corporate services income” and “other income” on the income statement.
(e) Certain derivatives previously classified as Level 2 were transferred to Level 3 because Level 3 unobservable inputs became significant. Certain derivatives previously classified as Level 3 were transferred to Level 2 because Level 3 unobservable inputs became less significant.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis in accordance with GAAP. The adjustments to fair value generally result from the application of accounting guidance that requires assets and liabilities to be recorded at the lower of cost or fair value, or assessed for impairment. There were no liabilities measured at fair value on a nonrecurring basis at December 31, 2020, and December 31, 2019. The following table presents our assets measured at fair value on a nonrecurring basis at December 31, 2020, and December 31, 2019:
December 31, 2020 December 31, 2019
in millions Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
ASSETS MEASURED ON A NONRECURRING BASIS
Impaired loans and leases — — $ 108 $ 108 — — $ 76 $ 76
Accrued income and other assets — $ — 56 56 — 118 51 169
Total assets on a nonrecurring basis at fair value — $ — $ 164 $ 164 — 118 $ 127 $ 245
Qualitative Disclosures of Valuation Techniques
The following table describes the valuation techniques and significant inputs used to measure the significant classes of assets and liabilities reported at fair value on a nonrecurring basis, as well as the classification of each within the valuation hierarchy.
137

Asset/liability class Valuation technique Valuation hierarchy classification(s)
Collateral-dependent loans When a loan is collateral-dependent, the fair value of the loan is determined based on the fair value of the underlying collateral. Level 3
Commercial loans and student loans held for sale
Through a quarterly analysis of our loan portfolios held for sale, which include both performing and nonperforming commercial loans and student loans, we determine any adjustments necessary to record the portfolios at the lower of cost or fair value in accordance with GAAP. Valuation inputs include:

• Non-binding bids for the respective loans or similar loans

• Recent sales transactions

• Internal models that emulate recent securitizations
Level 2 and 3
Direct financing leases and operating lease assets held for sale
Valuations of direct financing leases and operating lease assets held for sale are performed using an internal model that relies on market data, including:

• Swap rates and bond ratings
• Our own assumptions about the exit market for the leases
• Details about the individual leases in the portfolio
Leases for which we receive a current nonbinding bid, and for which the sale is considered probable, may be classified as Level 2. Valuations of lease and operating lease assets held for sale that employ our own assumptions are classified as Level 3 assets. The inputs based on our own assumptions include changes in the value of leased items and internal credit ratings.
Level 2 and 3
OREO, other repossessed personal properties, and right-of-use assets (a)
OREO, other repossessed properties, and right-of-use assets are valued based on:


• Appraisals and third-party price opinions, less estimated selling costs


Generally, we classify these assets as Level 3, but OREO and other repossessed properties for which we receive binding purchase agreements are classified as Level 2. Returned lease inventory is valued based on market data for similar assets and is classified as Level 2.

Level 2 and 3
LIHTC, HTC, and NMTC investments (a)
Valuation of LIHTC, HTC and NMTC involves measuring the present value of future tax benefits and comparing that value against the current carrying value of the investment. Expected future tax benefits are discounted to their present value using discounted cash flow modeling that incorporates an appropriate risk premium. LIHTC and HTC investments are impaired when it is more likely than not that the carrying amount of the investment will not be realized. Level 3
Other equity investments
We have other investments in equity securities that do not have readily determinable fair values and do not qualify for the practical expedient to measure the investment using a net asset value per share. We have elected to measure these securities at cost less impairment plus or minus adjustments due to observable orderly transactions. Impairment is recorded when there is evidence that the expected fair value of the investment has declined to below the recorded cost. At each reporting period, we assess if these investments continue to qualify for this measurement alternative.

At December 31, 2020, and December 31, 2019, the carrying amount of equity investments recorded under this method was $ 171 million and $ 134 million, respectively. No impairment was recorded for the year ended December 31, 2020.
Level 3
Mortgage Servicing Rights (a)
Refer to Note 9. Mortgage Servicing Assets Level 3
(a) Asset classes included in “Accrued income and other assets” on the Consolidated Balance Sheets





138

Quantitative Information about Level 3 Fair Value Measurements

The range and weighted-average of the significant unobservable inputs used to fair value our material Level 3 recurring and nonrecurring assets at December 31, 2020, and December 31, 2019, along with the valuation techniques used, are shown in the following table:
Level 3 Asset (Liability) Valuation Technique Significant
Unobservable Input
Range
(Weighted-Average) (b), (c)
dollars in millions
December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019
Recurring
Securities available-for-sale:
Other securities
$ 13 $ 11
Discounted cash flows
Discount rate
N/A ( 15.09 %)
N/A ( 16.10 %)
Marketability discount
N/A ( 30.00 %)
N/A ( 30.00 %)
Volatility factor
N/A ( 44.00 %)
N/A ( 43.00 %)
Other investments: (a)
Equity investments
Direct
13 12
Discounted cash flows
Discount rate
13.90 - 17.04 % ( 15.47 %)
13.91 - 17.24 % ( 15.61 %)
Marketability discount
N/A ( 30.00 %)
N/A ( 30.00 %)
Volatility factor
N/A ( 52.00 %)
N/A ( 47.00 %)
Loans, net of unearned income (residential)
11 4
Market comparable pricing
Comparability factor
64.50 %- 99.04 % ( 94.17 %)
79.00 - 98.00 % ( 91.05 %)
Derivative instruments:
Interest rate
56 22
Discounted cash flows
Probability of default
.02 - 100 % ( 7.90 %)
.02 - 100 % ( 5.40 %)
Internal risk rating
1 - 19 ( 9.675 )
1 - 19 ( 9.168 )
Loss given default
0 - 1 ( .483 )
0 - 1 ( .492 )
Credit (assets)
1 1
Discounted cash flows
Probability of default
.02 - 100 % ( 4.70 %)
.02 - 100 % ( 4.2 %)
Internal risk rating
1 - 19 ( 10.478 )
1 - 19 ( 10.13 )
Loss given default
0 - 1 ( .490 )
0 - 1 ( .498 )
Credit (liabilities)
( 11 ) ( 9 )
Discounted cash flows
Probability of default
.02 - 100 % ( 15.45 %)
.02 - 100 % ( 12.24 %)
Internal risk rating
1 - 19 ( 8.555 )
1 - 19 ( 8.058 )
Loss given default
0 - 1 ( .431 )
0 - 1 ( .411 )
Other (d)
32 5
Discounted cash flows
Loan closing rates
36.95 - 99.68 % ( 77.51 %)
37.71 - 99.69 % ( 79.33 %)
Nonrecurring
Impaired loans 108 76 Fair value of underlying collateral Discount rate
0 - 100.00 % ( 36.00 %)
0 - 60.00 % ( 10.00 %)
Accrued income and other assets: (e)
OREO 16 5 Appraised value Appraised value N/M N/M
(a) Principal investments, direct is excluded from this table as the balance at December 31, 2020, is insignificant (less than $ 1 million).
(a) The weighted average of significant unobservable inputs is calculated using a weighting relative to fair value.
(b) For significant unobservable inputs with no range, a single figure is reported to denote the single quantitative factor used.
(c) Amounts represent interest rate lock commitments.
(d) Excludes $ 40 million and $ 46 million pertaining to mortgage servicing assets measured at fair value as of December 31, 2020, and December 31, 2019, respectively. Refer to Note 9 (“Mortgage Servicing Assets”) for significant unobservable inputs pertaining to these assets.


139

Fair Value Disclosures of Financial Instruments

The levels in the fair value hierarchy ascribed to our financial instruments and the related carrying amounts at December 31, 2020, and December 31, 2019, are shown in the following table.
December 31, 2020
Fair Value
in millions
Carrying
Amount
Level 1 Level 2 Level 3
Measured
at NAV
Netting
Adjustment
Total
ASSETS (by measurement category)
Fair value - net income
Trading account assets (b)
$ 735 — $ 735 — — — $ 735
Other investments (b)
621 — — $ 555 $ 66 — 621
Loans, net of unearned income (residential) (d)
11 — — 11 — — 11
Loans held for sale (residential) (b)
264 — 264 — — — 264
Derivative assets - trading (b)
1,676 $ 78 1,939 91 — $ ( 433 )
(f)
1,675
Fair value - OCI
Securities available for sale (b)
27,556 — 27,543 13 — — 27,556
Derivative assets - hedging (b) (g)
123 — 70 — — 53
(f)
123
Amortized cost
Held-to-maturity securities (c)
7,595 — 8,023 — — — 8,023
Loans, net of unearned income (d)
99,548 — — 98,946 — — 98,946
Loans held for sale (b)
1,319 — — 1,319 — — 1,319
Other
Cash and short-term investments (a)
17,285 17,285 — — — — 17,285
LIABILITIES (by measurement category)
Fair value - net income
Derivative liabilities - trading (b)
154 72 746 11 — ( 675 )
(f)
154
Fair value - OCI
Derivative liabilities - hedging (b) (g)
( 3 ) — ( 3 ) — — —
(f)
( 3 )
Amortized cost
Time deposits (e)
5,743 — 5,765 — — — 5,765
Short-term borrowings (a)
979 256 723 — — — 979
Long-term debt (e)
13,709 13,925 734 — — — 14,659
Other
Deposits with no stated maturity (a)
129,539 — 129,539 — — —
129,539
December 31, 2019
Fair Value
in millions
Carrying
Amount
Level 1 Level 2 Level 3
Measured
at NAV
Netting
Adjustment
Total
ASSETS (by measurement category)
Fair value - net income
Trading account assets (b)
$ 1,040 — $ 1,040 — — — $ 1,040
Other investments (b)
605 — — $ 528 $ 77 — 605
Loans, net of unearned income (residential) (d)
4 — — 4 — — 4
Loans held for sale (residential) (b)
140 — 140 — — — 140
Derivative assets - trading (b)
715 $ 49 985 28 — $ ( 347 )
(f)
715
Fair value - OCI
Securities available for sale (b)
21,843 — 21,832 11 — — 21,843
Derivative assets - hedging (b) (g)
65 — 191 — — ( 126 )
(f)
65
Amortized cost
Held-to-maturity securities (c)
10,067 — 10,116 — — — 10,116
Loans, net of unearned income (d)
93,742 — — 92,641 — — 92,641
Loans held for sale (b)
1,194 — — 1,194 — — 1,194
Other
Cash and short-term investments (a)
2,004 2,004 — — — — 2,004
LIABILITIES (by measurement category)
Fair value - net income
Derivative liabilities - trading (b)
194 43 461 9 — ( 319 )
(f)
194
Fair value - OCI
Derivative liabilities - hedging (b) (g)
4 — 20 — — ( 16 )
(f)
4
Amortized cost
Time deposits (e)
11,652 — 11,752 — — — 11,752
Short-term borrowings (a)
1,092 19 1,073 — — — 1,092
Long-term debt (e)
12,448 12,694 $ 249 — — — 12,943
Other
Deposits with no stated maturity (a)
100,218 — 100,218 — — — 100,218
140

Valuation Methods and Assumptions
(a) Fair value equals or approximates carrying amount. The fair value of deposits with no stated maturity does not take into consideration the value ascribed to core deposit intangibles.
(b) Information pertaining to our methodology for measuring the fair values of these assets and liabilities is included in the sections entitled “Qualitative Disclosures of Valuation Techniques” and “Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis” in this Note. Investments accounted for under the cost method (or cost less impairment adjusted for observable price changes for certain equity investments) are classified as Level 3 assets. These investments are not actively traded in an open market as sales for these types of investments are rare. The carrying amount of the investments carried at cost are adjusted for declines in value if they are considered to be other-than-temporary (or due to observable orderly transactions of the same issuer for equity investments eligible for the cost less impairment measurement alternative). These adjustments are included in “other income” on the income statement.
(c) Fair values of held-to-maturity securities are determined by using models that are based on security-specific details, as well as relevant industry and economic factors. The most significant of these inputs are quoted market prices, interest rate spreads on relevant benchmark securities, and certain prepayment assumptions. We review the valuations derived from the models to ensure that they are reasonable and consistent with the values placed on similar securities traded in the secondary markets.
(d) The fair value of loans is based on the present value of the expected cash flows. The projected cash flows are based on the contractual terms of the loans, adjusted for prepayments and use of a discount rate based on the relative risk of the cash flows, taking into account the loan type, maturity of the loan, liquidity risk, servicing costs, and a required return on debt and capital. In addition, an incremental liquidity discount is applied to certain loans, using historical sales of loans during periods of similar economic conditions as a benchmark. The fair value of loans includes lease financing receivables at their aggregate carrying amount, which is equivalent to their fair value.
(e) Fair values of time deposits and long-term debt are based on discounted cash flows utilizing relevant market inputs.
(f) Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The net basis takes into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related cash collateral. Total derivative assets and liabilities include these netting adjustments.
(g) Derivative assets-hedging and derivative liabilities-hedging includes both cash flow and fair value hedges. Additional information regarding our accounting policies for cash flow and fair value hedges is provided in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Derivatives and Hedging.”
We determine fair value based on assumptions pertaining to the factors that a market participant would consider in valuing the asset. A substantial portion of our fair value adjustments are related to liquidity. During 2019 and 2020, the fair values of our loan portfolios generally remained stable, primarily due to sustained liquidity in the loan markets. If we were to use different assumptions, the fair values shown in the preceding table could change. Also, because the applicable accounting guidance for financial instruments excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements, the fair value amounts shown in the table above do not, by themselves, represent the underlying value of our company as a whole.

Discontinued assets - education lending business . Our discontinued assets include government-guaranteed and private education loans originated through our education lending business that was discontinued in September 2009. This portfolio consists of loans recorded at carrying value with appropriate valuation reserves and loans in portfolio recorded at fair value. All of these loans were excluded from the table above as follows:

• Loans at carrying value, net of allowance, of $ 674 million ($ 567 million at fair value) at December 31, 2020, and $ 855 million ($ 729 million at fair value) at December 31, 2019; and
• Portfolio loans at fair value of $ 2 million at December 31, 2020, and $ 2 million at December 31, 2019.

These loans and securities are classified as Level 3 because we rely on unobservable inputs when determining fair value since observable market data is not available.

Short-term financial instruments. For financial instruments with a remaining average life to maturity of less than six months, carrying amounts were used as an approximation of fair values.

141

7. Securities

The amortized cost, unrealized gains and losses, and approximate fair value of our securities available for sale and held-to-maturity securities are presented in the following tables. Gross unrealized gains and losses represent the difference between the amortized cost and the fair value of securities on the balance sheet as of the dates indicated. Accordingly, the amount of these gains and losses may change in the future as market conditions change.
2020 2019
December 31,
in millions
Amortized
Cost (a)
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
SECURITIES AVAILABLE FOR SALE
U.S. Treasury, Agencies, and Corporations $ 1,000 — — $ 1,000 $ 334 — $ — $ 334
States and political subdivisions — — — — 4 — — 4
Agency residential collateralized mortgage obligations
14,001 $ 297 $ 25 14,273 12,772 $ 82 71 12,783
Agency residential mortgage-backed securities 2,094 70 — 2,164 1,677 41 4 1,714
Agency commercial mortgage-backed securities 9,707 432 33 10,106 6,898 139 40 6,997
Other securities 8 5 — 13 7 4 — 11
Total securities available for sale $ 26,810 $ 804 $ 58 $ 27,556 $ 21,692 $ 266 $ 115 $ 21,843
HELD-TO-MATURITY SECURITIES
Agency residential collateralized mortgage obligations
$ 3,775 $ 124 $ — $ 3,899 $ 5,692 $ 23 $ 49 $ 5,666
Agency residential mortgage-backed securities 271 14 — 285 409 6 — 415
Agency commercial mortgage-backed securities 3,515 290 — 3,805 3,940 78 9 4,009
Asset-backed securities 19 — — 19 11 — — 11
Other securities 15 — — 15 15 — — 15
Total held-to-maturity securities $ 7,595 $ 428 $ — $ 8,023 $ 10,067 $ 107 $ 58 $ 10,116
(a) Amortized cost amounts exclude accrued interest receivable which is recorded within “other assets” on the balance sheet. At December 31, 2020 accrued interest receivable on available for sale securities and held-to-maturity securities totaled $ 42 million and $ 15 million, respectively.

The following table summarizes available for sale securities in an unrealized loss position for which an allowance for credit losses has not been recorded as of December 31, 2020, and December 31, 2019:
Duration of Unrealized Loss Position
Less than 12 Months 12 Months or Longer Total
in millions Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
December 31, 2020
Securities available for sale:
Agency residential collateralized mortgage obligations $ 2,110 $ 25 $ — $ — $ 2,110 $ 25
Agency residential mortgage-backed securities 6 —
(a)
$ 5 —
(a)
11 —
Agency commercial mortgage-backed securities 2,709 33 — — 2,709 33
Held-to-maturity securities:
Agency residential collateralized mortgage obligations — — 24 —
(a)
24 —
Other securities 5 —
(a)
— — 5 —
Total securities in an unrealized loss position $ 4,830 $ 58 $ 29 $ — $ 4,859 $ 58
December 31, 2019
Securities available for sale:
U.S. Treasury, agencies, and corporations $ 30 —
(b)
$ 30 —
(b)
$ 60 —
Agency residential collateralized mortgage obligations 3,432 $ 20 3,221 $ 51 6,653 $ 71
Agency residential mortgage-backed securities 33 —
(b)
629 4 662 4
Agency commercial mortgage-backed securities 1,541 17 1,213 23 2,754 40
Held-to-maturity securities:
Agency residential collateralized mortgage obligations 1,626 14 2,289 35 3,915 49
Agency residential mortgage-backed securities 56 —
(b)
— — 56 —
Agency commercial mortgage-backed securities 518 9 — — 518 9
Asset-backed securities 11 —
(b)
— — 11 —
Other securities 3 —
(b)
— — 3 —
Total securities in an unrealized loss position $ 7,250 $ 60 $ 7,382 $ 113 $ 14,632 $ 173
(a) At December 31, 2020, gross unrealized losses totaled less than $1 million for agency residential mortgage-backed securities available for sale with a loss duration of less than 12 months and less than $1 million for other securities held-to-maturity with a loss duration of less than 12 months. At December 31, 2020, gross unrealized losses totaled less than $1 million for agency residential mortgage-backed securities available for sale with a loss duration greater than 12 months or longer and less than $1 million. for agency residential mortgage-backed securities held to maturity.
(b) At December 31, 2019, gross unrealized losses totaled less than $1 million for U.S. Treasury, Agencies, and Corporations and agency residential mortgage-backed securities available for sale with a loss duration of less than 12 months and less than $1 million for agency residential mortgage-backed securities, asset-backed securities, and other securities held-to-maturity with a loss duration of less than 12 months. At December 31, 2019, gross unrealized losses totaled less than $1 million for U.S. Treasury, Agencies, and Corporations securities available for sale with a loss duration greater than 12 months or longer.
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Based on our evaluation at December 31, 2020, under the new impairment model, an allowance for credit losses has not been recorded nor have unrealized losses been recognized into income. The issuers of the securities are of high credit quality and have a long history of no credit losses, management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely attributed to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments.

At December 31, 2020, securities available-for-sale and held-to-maturity securities totaling $ 13.6 billion were pledged to secure securities sold under repurchase agreements, to secure public and trust deposits, to facilitate access to secured funding, and for other purposes required or permitted by law.
The following table shows securities by remaining maturity. CMOs and other mortgage-backed securities in the available-for-sale and held-to-maturity portfolios are presented based on their expected average lives. The remaining securities, in both the available-for-sale and held-to-maturity portfolios, are presented based on their remaining contractual maturity. Actual maturities may differ from expected or contractual maturities since borrowers have the right to prepay obligations with or without prepayment penalties.
Securities
Available for Sale 		Held-to-Maturity
Securities
December 31, 2020
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
in millions
Due in one year or less $ 1,889 $ 1,896 $ 77 $ 78
Due after one through five years 15,410 15,891 4,941 5,150
Due after five through ten years 6,686 6,964 2,577 2,795
Due after ten years 2,825 2,805 — —
Total $ 26,810 $ 27,556 $ 7,595 $ 8,023
8. Derivatives and Hedging Activities
We are a party to various derivative instruments, mainly through our subsidiary, KeyBank. The primary derivatives that we use are interest rate swaps, caps, floors, forwards and futures; foreign exchange contracts; commodity derivatives; and credit derivatives. These instruments help us manage exposure to interest rate risk, mitigate the credit risk inherent in our loan portfolio, hedge against changes in foreign currency exchange rates, and meet client financing and hedging needs. As further discussed in this note:
• interest rate risk is the risk that the EVE or net interest income will be adversely affected by fluctuations in interest rates;
• credit risk is the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms; and
• foreign exchange risk is the risk that an exchange rate will adversely affect the fair value of a financial instrument.
At December 31, 2020, after taking into account the effects of bilateral collateral and master netting agreements, we ha d $ 123 million of derivative assets and $ 3 million of derivative liabilities that relate to contracts entered into for hedging purposes. As of the same date, after taking into account the effects of bilateral collateral and master netting agreements and a reserve for potential future losses, we had derivative assets of $ 1.7 billion and derivative liabilities of $ 153 million that were not designated as hedging instruments. These positions are primarily comprised of derivative contracts entered into for client accommodation purposes.

Additional information regarding our accounting policies for derivatives is provided in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Derivatives and Hedging.”
143

Derivatives Designated in Hedge Relationships
Net interest income and the EVE change in response to changes in the mix of assets, liabilities, and off-balance sheet instruments and the associated interest rates tied to each instrument. In addition, differences in the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities cause net interest income and the EVE to fluctuate. We utilize derivatives that have been designated as part of a hedge relationship in accordance with the applicable accounting guidance to manage net interest income and EVE to within our stated risk tolerances. The primary derivative instruments used to manage interest rate risk are interest rate swaps.
We designate certain “receive fixed/pay variable” interest rate swaps as fair value hedges. These contracts convert certain fixed-rate long-term debt into variable-rate obligations, thereby modifying our exposure to changes in interest rates. As a result, we receive fixed-rate interest payments in exchange for making variable-rate payments over the lives of the contracts without exchanging the notional amounts.
Similarly, we designate certain “receive fixed/pay variable” interest rate swaps as cash flow hedges. These contracts effectively convert certain floating-rate loans into fixed-rate loans to reduce the potential adverse effect of interest rate decreases on future interest income. Again, we receive fixed-rate interest payments in exchange for making variable-rate payments over the lives of the contracts without exchanging the notional amounts.
We designate interest rate floors as cash flow hedges. Interest rate floors also reduce the potential adverse effect of interest rate decreases on future interest income. We receive interest payments when the strike price specified in the contracts falls below a reference rate in exchange for an upfront premium.
We designate certain “pay fixed/receive variable” interest rate swaps as cash flow hedges. These swaps convert certain floating-rate debt into fixed-rate debt. We also use these swaps to manage the interest rate risk associated with anticipated sales of certain commercial real estate loans and certain student loans originated through our Laurel Road digital lending business. The swaps protect against the possible short-term decline in the value of the loans that could result from changes in interest rates between the time they are originated and the time they are sold.
We use foreign currency forward transactions to hedge the foreign currency exposure of our net investment in various foreign equipment finance entities. These entities are denominated in a non-U.S. currency. These swaps are designated as net investment hedges to mitigate the exposure of measuring the net investment at the spot foreign exchange rate. Our last remaining net investment hedge was discontinued in the fourth quarter of 2019 in connection with the liquidation of the net assets of KEF’s Canadian subsidiary.
Derivatives Not Designated in Hedge Relationships

We may enter into interest rate swap contracts to manage economic risks but do not designate the instruments in hedge relationships. Excluding contracts addressing customer exposures, the amount of derivatives hedging risks on an economic basis at December 31, 2020, was not significant.
Like other financial services institutions, we originate loans and extend credit, both of which expose us to credit risk. We actively manage our overall loan portfolio and the associated credit risk in a manner consistent with asset quality objectives and concentration risk tolerances to mitigate portfolio credit risk. Purchasing credit protection through default swaps enables us to transfer to a third party a portion of the credit risk associated with a particular extension of credit, including situations where there is a forecasted sale of loans. We purchase credit default swaps to reduce the credit risk associated with the debt securities held in our trading portfolio.

We also enter into derivative contracts for other purposes, including:
• interest rate swap, cap, and floor contracts entered into generally to accommodate the needs of commercial loan clients;
• energy and base metal swap and option contracts entered into to accommodate the needs of clients;
• foreign exchange forward and option contracts entered into primarily to accommodate the needs of clients; and
• futures contracts and positions with third parties that are intended to offset or mitigate the interest rate or market risk related to client positions discussed above.
144

Fair Values, Volume of Activity, and Gain/Loss Information Related to Derivative Instruments
The following table summarizes the fair values of our derivative instruments on a gross and net basis as of December 31, 2020, and December 31, 2019. The change in the notional amounts of these derivatives by type from December 31, 2019, to December 31, 2020, indicates the volume of our derivative transaction activity during 2020. The notional amounts are not affected by bilateral collateral and master netting agreements. The derivative asset and liability balances are presented on a gross basis, prior to the application of bilateral collateral and master netting agreements. Total derivative assets and liabilities are adjusted to take into account the impact of legally enforceable master netting agreements that allow us to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related cash collateral. Where master netting agreements are not in effect or are not enforceable under bankruptcy laws, we do not adjust those derivative assets and liabilities with counterparties. Securities collateral related to legally enforceable master netting agreements is not offset on the balance sheet. Our derivative instruments are included in “accrued income and other assets” or “accrued expenses and other liabilities” on the balance sheet, as indicated in the following table:
December 31, 2020 December 31, 2019
Fair Value (a)
Fair Value
in millions
Notional
Amount
Derivative
Assets
Derivative
Liabilities
Notional
Amount
Derivative
Assets
Derivative
Liabilities
Derivatives designated as hedging instruments:
Interest rate $ 36,135 $ 70 $ ( 3 ) $ 39,208 $ 191 $ 20
Total 36,135 70 ( 3 ) 39,208 191 20
Derivatives not designated as hedging instruments:
Interest rate 78,424 1,514 291 71,209 772 233
Foreign exchange 6,385 109 103 6,572 67 60
Commodity 9,702 426 408 5,324 208 200
Credit 423 1 11 427 1 10
Other (b)
4,951 58 16 3,337 14 10
Total 99,885 2,108 829 86,869 1,062 513
Netting adjustments (c)
— ( 380 ) ( 675 ) — ( 473 ) ( 335 )
Net derivatives in the balance sheet 136,020 1,798 151 126,077 780 198
Other collateral (d)
— ( 2 ) ( 11 ) — ( 2 ) ( 42 )
Net derivative amounts $ 136,020 $ 1,796 $ 140 $ 126,077 $ 778 $ 156
(a) We take into account bilateral collateral and master netting agreement that allow us to settle all derivative contracts held with a single counterparty on a net basis, and to offset the net derivative position with the related cash collateral when recognizing derivative assets and liabilities. As a result, we could have derivative contracts with negative fair values included in derivative assets and contracts with positive fair values included in derivative liabilities.
(b) Other derivatives include interest rate lock commitments and forward sale commitments related to our residential mortgage banking activities, forward purchase and sales contracts consisting of contractual commitments associated with “to be announced” securities and when issued securities.
(c) Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance.
(d) Other collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The other collateral consists of securities and is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the other collateral cannot reduce the net derivative position below zero. Therefore, excess other collateral, if any, is not reflected above.

Fair value hedges. During the year ended December 31, 2020, we did not exclude any portion of these hedging instruments from the assessment of hedge effectiveness.
The following tables summarize the amounts that were recorded on the balance sheet as of December 31, 2020 and December 31, 2019, related to cumulative basis adjustments for fair value hedges.
December 31, 2020
in millions Balance sheet line item in which the hedge item is included
Carrying amount of hedged item (a)
Hedge accounting basis adjustment
Interest rate contracts
Long-term debt (b)
$ 8,182 $ 416
Interest rate contracts
Securities available for sale (c)
2,080 ( 21 )
December 31, 2019
in millions Balance sheet line item in which the hedge item is included
Carrying amount of hedged item (a)
Hedge accounting basis adjustment
Interest rate contracts
Long-term debt (b)
$ 8,408 $ 240
(a) The carrying amount represents the portion of the asset or liability designated as the hedged item.
(b) Basis adjustments related to de-designated hedges that no longer qualify as fair value hedges reduced the hedge accounting basis adjustment by $ 8 million and $ 9 million at December 31, 2020 and December 31, 2019, respectively.
(c) These amounts are designated as fair value hedges under the last-of-layer method. The carrying amount represents the amortized costs basis of the prepayable financial assets used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. At December 31, 2020, the amortized cost of the closed portfolios used in these hedging relationships was $ 2.5 billion
145


Cash flow hedges. During the year ended December 31, 2020, we did not exclude any portion of these hedging instruments from the assessment of hedge effectiveness.

Considering the interest rates, yield curves, and notional amounts as of December 31, 2020, we would expect to reclassify an estim ated $ 232 million of after-tax net losses on derivative instruments from AOCI to income during the next 12 months for our cash flow hedges. In addition, we expect to reclassify approximately $ 73 million of pre-tax net losses related to terminated cash flow hedges from AOCI to income during the next 12 months. As of December 31, 2020, the maximum length of time over which we hedge forecasted transactions is 11 years.

The following tables summarize the effect of fair value and cash flow hedge accounting on the income statement for the years ended December 31, 2020, December 31, 2019, and December 31, 2018.
Location and amount of net gains (losses) recognized in income on fair value and cash flow hedging relationships (a)
in millions Interest expense – long-term debt Interest income – loans Investment banking and debt placement fees Interest expense – deposits Other income
Twelve months ended December 31, 2020
Total amounts presented in the consolidated statement of income $ ( 286 ) $ 3,866 $ 661 $ ( 347 ) $ 15
Net gains (losses) on fair value hedging relationships
Interest contracts
Recognized on hedged items ( 177 ) — — — —
Recognized on derivatives designated as hedging instruments 305 — — — —
Net income (expense) recognized on fair value hedges 128 — — — —
Net gain (loss) on cash flow hedging relationships
Realized gains (losses) (pre-tax) reclassified from AOCI into net income
Interest contracts ( 4 ) 319 — — —
Net income (expense) recognized on cash flow hedges $ ( 4 ) $ 319 $ — — —
Twelve months ended December 31, 2019
Total amounts presented in the consolidated statement of income $ ( 454 ) $ 4,267 $ 630 $ ( 853 ) $ 68
Net gains (losses) on fair value hedging relationships
Interest contracts
Recognized on hedged items ( 247 ) — — ( 1 ) —
Recognized on derivatives designated as hedging instruments 231 — — — —
Net income (expense) recognized on fair value hedges ( 16 ) — — $ ( 1 ) $ —
Net gain (loss) on cash flow hedging relationships
Realized gains (losses) (pre-tax) reclassified from AOCI into net income
Interest contracts ( 1 ) 15 — — —
Foreign exchange contracts — — — — 32
Net income (expense) recognized on cash flow hedges $ ( 1 ) $ 15 $ — — $ 32
Twelve months ended December 31, 2018
Total amounts presented in the consolidated statement of income $ ( 420 ) $ 4,023 $ 650 $ ( 517 ) $ 176
Net gains (losses) on fair value hedging relationships
Interest contracts
Recognized on hedged items ( 5 ) — — 1 —
Recognized on derivatives designated as hedging instruments ( 12 ) — — — —
Net income (expense) recognized on fair value hedges ( 17 ) — — 1 $ —
Net gain (loss) on cash flow hedging relationships
Realized gains (losses) (pre-tax) reclassified from AOCI into net income
Interest contracts ( 2 ) ( 68 ) 2 — 31
Net income (expense) recognized on cash flow hedges $ ( 2 ) $ ( 68 ) $ 2 — 31

Net investment hedges. We previously entered into foreign currency forward contracts to hedge our exposure to changes in the carrying value of our investments in foreign subsidiaries as a result of changes in the related foreign exchange rates. In December 2019, our last remaining net investment hedge was discontinued in connection with the substantial liquidation of the net assets of KEF’s Canadian subsidiary. The discontinuance of this hedge relationship resulted in reclassification from AOCI into other income of pre-tax gains of $ 25 million related to cumulative changes in the fair value of the net investment hedge. The gain was offset by the reclassification of $ 11 million from AOCI into other income related to the pre-tax foreign currency translation adjustment loss on the net investment balance.

The following table summarizes the pre-tax net gains (losses) on our cash flow and net investment hedges for the years ended December 31, 2020, December 31, 2019, and December 31, 2018, and where they are recorded on
146

the income statement. The table includes net gains (losses) recognized in OCI during the period and net gains (losses) reclassified from AOCI into income during the current period.
in millions Net Gains (Losses)
Recognized in OCI 		Income Statement Location of Net Gains (Losses)
Reclassified From OCI Into Income
Net Gains
(Losses) Reclassified
From OCI Into Income (a)
Net Gains (Losses) Recognized in Other Income (a)
Twelve months ended December 31, 2020
Cash Flow Hedges
Interest rate $ 628 Interest income — Loans $ 319 $ —
Interest rate ( 5 ) Interest expense — Long-term debt ( 4 ) —
Interest rate ( 9 ) Investment banking and debt placement fees — —
Net Investment Hedges
Foreign exchange contracts — Other Income — —
Total $ 614 $ 315 $ —
Twelve months ended December 31, 2019
Cash Flow Hedges
Interest rate $ 442 Interest income — Loans $ 15 $ —
Interest rate ( 1 ) Interest expense — Long-term debt ( 1 ) —
Interest rate 3 Investment banking and debt placement fees — —
Net Investment Hedges
Foreign exchange contracts ( 4 ) Other Income 32 —
Total $ 440 $ 46 $ —
Twelve months ended December 31, 2018
Cash Flow Hedges
Interest rate $ ( 13 ) Interest income — Loans $ ( 68 ) $ —
Interest rate 2 Interest expense — Long-term debt ( 2 ) —
Interest rate 1 Investment banking and debt placement fees 2 —
Net Investment Hedges
Foreign exchange contracts 19 Other Income 31 —
Total $ 9 $ ( 37 ) $ —

Nonhedging instruments.

The following table summarizes the pre-tax net gains (losses) on our derivatives that are not designated as hedging instruments for the years ended December 31, 2020, December 31, 2019, and December 31, 2018, and where they are recorded on the income statement.
2020 2019 2018
Year ended December 31,
in millions
Corporate
Services
Income 		Consumer Mortgage Income Other
Income 		Total Corporate
Services
Income 		Consumer Mortgage Income Other
Income 		Total Corporate
Services
Income 		Consumer Mortgage Income Other
Income 		Total
NET GAINS (LOSSES)
Interest rate $ 32 — $ ( 10 ) $ 22 $ 46 — $ ( 2 ) $ 44 $ 38 — $ ( 1 ) $ 37
Foreign exchange 41 — — 41 45 — — 45 42 — — 42
Commodity 19 — — 19 6 — — 6 8 — — 8
Credit ( 4 ) — ( 29 ) ( 33 ) ( 6 ) — ( 36 ) ( 42 ) 2 — ( 30 ) ( 28 )
Other — $ 19 19 38 — $ 2 — 2 — $ ( 1 ) 12 11
Total net gains (losses) $ 88 $ 19 $ ( 20 ) $ 87 $ 91 $ 2 $ ( 38 ) $ 55 $ 90 $ ( 1 ) $ ( 19 ) $ 70
Counterparty Credit Risk
We use several means to mitigate and manage exposure to credit risk on derivative contracts. We enter into bilateral collateral and master netting agreements that provide for the net settlement of all contracts with a single counterparty in the event of default. Additionally, we monitor counterparty credit risk exposure on each contract to determine appropriate limits on our total credit exposure across all product types. We review our collateral positions on a daily basis and exchange collateral with our counterparties in accordance with standard ISDA documentation, central clearing rules, and other related agreements. We hold collateral in the form of cash and highly rated securities issued by the U.S. Treasury, government-sponsored enterprises, or GNMA. Cash collateral netted against derivative assets on the balance sheet totaled $ 63 million at December 31, 2020, and $ 207 million at December 31, 2019. The cash collateral netted against derivative liabilities totaled $ 232 million at December 31, 2020, and $ 69 million at December 31, 2019.





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The following table summarizes the fair value of our derivative assets by type at the dates indicated. These assets represent our gross exposure to potential loss after taking into account the effects of bilateral collateral and master netting agreements and other means used to mitigate risk.
December 31,
in millions
2020 2019
Interest rate $ 1,448 $ 848
Foreign exchange 52 30
Commodity 178 95
Credit ( 1 ) —
Other 58 14
Derivative assets before collateral 1,735 987
Add (Less): Related collateral 63 ( 207 )
Total derivative assets $ 1,798 $ 780
We enter into derivative transactions with two primary groups: broker-dealers and banks, and clients. Since these groups have different economic characteristics, we have different methods for managing counterparty credit exposure and credit risk.
We enter into transactions with broker-dealers and banks for various risk management purposes. These types of transactions are primarily high dollar volume. We enter into bilateral collateral and master netting agreements with these counterparties. We clear certain types of derivative transactions with these counterparties, whereby central clearing organizations become the counterparties to our derivative contracts. In addition, we enter into derivative contracts through swap execution facilities. Swap clearing and swap execution facilities reduce our exposure to counterparty credit risk. At December 31, 2020, we had gross exposure of $ 250 million to broker-dealers and banks. We had net exposure of $ 245 million after the application of master netting agreements and cash collateral, where such qualifying agreements exist. We had net exposure of $ 243 million after considering $ 3 million of additional collateral held in the form of securities.

We enter into transactions using master netting agreements with clients to accommodate their business needs. In most cases, we mitigate our credit exposure by cross-collateralizing these transactions to the underlying loan collateral. For transactions that are not clearable, we mitigate our market risk by buying and selling U.S. Treasuries and Eurodollar futures or entering into offsetting positions. Due to the cross-collateralization to the underlying loan, we typically do not exchange cash or marketable securities collateral in connection with these transactions. To address the risk of default associated with t hese contracts, we have established a CVA reserve (included in “accrued income and other assets”) in the amount of $ 49 million at December 31, 2020. The CVA is calculated from potential future exposures, expected recovery rates, and market-implied probabilities of default. At December 31, 2020, we had gross exposure of $ 1.7 billion to client counterparties and other entities that are not broker-dealers or banks for derivatives that have associated master netting agreements. We had net exposure of $ 1.6 billion on our derivatives with these counterparties after the application of master netting agreements, collateral, and the related reserve.
Credit Derivatives
We are a buyer and, under limited circumstances, may be a seller of credit protection through the credit derivative market. We purchase credit derivatives to manage the credit risk associated with specific commercial lending and swap obligations as well as exposures to debt securities. Our credit derivative portfolio was in a net liability position of $ 9 million as of both December 31, 2020, and December 31, 2019.

Our credit derivative portfolio may consist of the following:

• Single-name credit default swap : A bilateral contract whereby the seller agrees, for a premium, to provide protection against the credit risk of a specific entity (the “reference entity”) in connection with a specific debt obligation. The protected credit risk is related to adverse credit events, such as bankruptcy, failure to make payments, and acceleration or restructuring of obligations, identified in the credit derivative contract.

• Traded credit default swap index: Represents a position on a basket or portfolio of reference entities.

• Risk participation agreement: A transaction in which the lead participant has a swap agreement with a customer. The lead participant (purchaser of protection) then enters into a risk participation agreement with
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a counterparty (seller of protection), under which the counterparty receives a fee to accept a portion of the lead participant’s credit risk. If the customer defaults on the swap contract, the counterparty to the risk participation agreement must reimburse the lead participant for the counterparty’s percentage of the positive fair value of the customer swap as of the default date. If the customer swap has a negative fair value, the counterparty has no reimbursement requirements. If the customer defaults on the swap contract and the seller fulfills its payment obligations under the risk participation agreement, the seller is entitled to a pro rata share of the lead participant’s claims against the customer under the terms of the swap agreement.

The following table provides information on the types of credit derivatives sold by us and held on the balance sheet at December 31, 2020, and December 31, 2019. The notional amount represents the amount that the seller could be required to pay. The payment/performance risk shown in the table represents a weighted average of the default probabilities for all reference entities in the respective portfolios. These default probabilities are implied from observed credit indices in the credit default swap market, which are mapped to reference entities based on Key’s internal risk rating.
2020 2019
December 31,
dollars in millions
Notional
Amount 		Average
Term
(Years) 		Payment /
Performance
Risk 		Notional
Amount 		Average
Term
(Years) 		Payment /
Performance
Risk
Other $ 227 12.76 19.53 % $ 134 14.30 14.56 %
Total credit derivatives sold $ 227 — — $ 134 — —
Credit Risk Contingent Features

We have entered into certain derivative contracts that require us to post collateral to the counterparties when these contracts are in a net liability position. The amount of collateral to be posted is based on the amount of the net liability and thresholds generally related to our long-term senior unsecured credit ratings with Moody’s and S&P. Collateral requirements also are based on minimum transfer amounts, which are specific to each Credit Support Annex (a component of the ISDA Master Agreement) that we have signed with the counterparties. In a limited number of instances, counterparties have the right to terminate their ISDA Master Agreements with us if our ratings fall below a certain level, usually investment-grade level (i.e., “Baa3” for Moody’s and “BBB-” for S&P). At December 31, 2020, KeyBank’s rating w as “A3” with Moody’s and “A-” with S&P, and KeyCorp’s rating was “Baa1” with Moody’s and “BBB+” with S&P. As of December 31, 2020, the aggregate fair value of all derivative contracts with credit risk contingent features (i.e., those containi ng collateral posting or termination provisions based on our ratings) held by KeyBank that were in a net liability position totale d $ 44 million, which includes $ 111 million in derivative assets and $ 156 million in derivative liabilities. We had $ 30 million in c ash and securities collateral posted to cover those positions as of December 31, 2020. There were no derivative contracts with credit risk contingent features held by KeyCorp at December 31, 2020.

The following table summarizes the additional cash and securities collateral that KeyBank would have been required to deliver under the ISDA Master Agreements had the credit risk contingent features been triggered for the derivative contracts in a net liability position as of December 31, 2020, and December 31, 2019. The additional collateral amounts were calculated based on scenarios under which KeyBank’s ratings are downgraded one, two, or three ratings as of December 31, 2020, and December 31, 2019, and take into account all collateral already posted. A similar calculation was performed for KeyCorp, and no additional collateral would have been required at December 31, 2020, or December 31, 2019.
December 31,
in millions
2020 2019
Moody’s S&P Moody’s S&P
KeyBank’s long-term senior unsecured credit ratings A3 A- A3 A-
One rating downgrade $ 1 $ 1 $ 1 $ 1
Two rating downgrades 1 1 1 1
Three rating downgrades 1 1 1 1

KeyBank’s long-term senior unsecured credit rating was four ratings above noninvestment grade at Moody’s and S&P as of December 31, 2020, and December 31, 2019. If KeyBank’s ratings had been downgraded below investment grade as of December 31, 2020, and December 31, 2019, payments of up to $ 2 million and $ 3 million, respectively, would have been required to either terminate the contracts or post additional collateral for those contracts in a net liability position, taking into account all collateral already posted. If KeyCorp’s ratings had been downgraded below investment grade as of December 31, 2020, and December 31, 2019, no payments would h ave
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been required to either terminate the contracts or post additional collateral for those contracts in a net liability position, taking into account all collateral already posted.

9. Mortgage Servicing Assets

We originate and periodically sell commercial and residential mortgage loans but continue to service those loans for the buyers. We also may purchase the right to service commercial mortgage loans for other lenders. We record a servicing asset if we purchase or retain the right to service loans in exchange for servicing fees that exceed the going market servicing rate and are considered more than adequate compensation for servicing. Additional information pertaining to the accounting for mortgage and other servicing assets is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Servicing Assets.”

Commercial

Changes in the carrying amount of commercial mortgage servicing assets are summarized as follows:
Year ended December 31,
in millions
2020 2019
Balance at beginning of period $ 539 $ 502
Servicing retained from loan sales 138 108
Purchases 33 47
Amortization ( 117 ) ( 115 )
Temporary impairments ( 15 ) ( 3 )
Balance at end of period $ 578 $ 539
Fair value at end of period $ 668 $ 665

The fair value of commercial mortgage servicing assets is determined by calculating the present value of future cash flows associated with servicing the commercial mortgage loans. This calculation uses a number of assumptions that are based on current market conditions. The range and weighted-average of the significant unobservable inputs used to fair value our commercial mortgage servicing assets at December 31, 2020, and December 31, 2019, along with the valuation techniques, are shown in the following table:
dollars in millions December 31, 2020 December 31, 2019
Valuation Technique
Significant
Unobservable Input
Range Weighted-Average Range Weighted-Average
Discounted cash flow Expected defaults 1.01 2.00 % 1.18 % 1.00 2.00 % 1.13 %
Residual cash flows discount rate 7.48 10.62 % 9.22 % 7.00 11.44 % 9.32 %
Escrow earn rate 0.92 1.14 % 1.04 % 1.44 2.32 % 2.03 %
Loan assumption rate 0.00 1.77 % 1.43 % 0.01 3.37 % 1.37 %
If these economic assumptions change or prove incorrect, the fair value of commercial mortgage servicing assets may also change. Expected credit losses, escrow earn rates, and discount rates are critical to the valuation of commercial mortgage servicing assets. Estimates of these assumptions are based on how a market participant would view the respective rates and reflect historical data associated with the commercial mortgage loans, industry trends, and other considerations. Actual rates may differ from those estimated due to changes in a variety of economic factors. A decrease in the value assigned to the escrow earn rates would cause a decrease in the fair value of our commercial mortgage servicing assets. An increase in the assumed default rates of commercial mortgage loans or an increase in the assigned discount rates would cause a decrease in the fair value of our commercial mortgage servicing assets. Prepayment activity on commercial serviced loans does not significantly impact the valuation of our commercial mortgage servicing assets. Unlike residential mortgages, commercial mortgages experience significantly lower prepayments due to certain contractual restrictions impacting the borrower’s ability to prepay the mortgage.

The amortization of commercial mortgage servicing assets for each period, as shown in the table at the beginning of this note, is recorded as a reduction to contractual fee income. The contractual fee income from servicing commercial mortgage loans totaled $ 214 million for the year ended December 31, 2020, $ 196 million for the year ended December 31, 2019, and $ 171 million for the year ended December 31, 2018. This fee income was partially offset by $ 117 million of amortization for the year ended December 31, 2020, $ 115 million for the year ended December 31, 2019, and $ 102 million for the year ended December 31, 2018. Both the contractual fee income and the amortization are recorded, net, in “commercial mortgage servicing fees” on the income statement.
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Residential

Changes in the carrying amount of residential mortgage servicing assets are summarized as follows:
in millions
2020 2019
Balance at beginning of period
$ 46 37
Servicing retained from loan sales
36 $ 15
Purchases
— —
Amortization ( 14 ) ( 6 )
Temporary impairments $ ( 10 ) $ —
Balance at end of period $ 58 $ 46
Fair value at end of period
$ 60 $ 50

The fair value of residential mortgage servicing assets is determined by calculating the present value of future cash flows associated with servicing the residential mortgage loans. This calculation uses a number of assumptions that are based on current market conditions. The range and weighted-average of the significant unobservable inputs used to fair value our residential mortgage servicing assets at December 31, 2020, along with the valuation techniques, are shown in the following table:
December 31, 2020 December 31, 2019
Valuation Technique
Significant
Unobservable Input
Range Weighted-Average Range Weighted-Average
Discounted cash flow Prepayment speed 12.39 54.27 % 17.09 % 10.38 61.51 % 12.95 %
Discount rate 7.51 8.63 % 7.55 % 7.5 8.50 % 7.52 %
Servicing cost $ 62.00 $ 5,125 $ 75.37 $ 62 $ 4,375 $ 68.73

If these economic assumptions change or prove incorrect, the fair value of residential mortgage servicing assets may also change. Prepayment speed, discount rates, and servicing cost     are critical to the valuation of residential mortgage servicing assets. Estimates of these assumptions are based on how a market participant would view the respective rates and reflect historical data associated with the residential mortgage loans, industry trends, and other considerations. Actual rates may differ from those estimated due to changes in a variety of economic factors. An increase in the prepayment speed would cause a decrease in the fair value of our residential mortgage servicing assets. An increase in the assigned discount rates and servicing cost assumptions would cause a decrease in the fair value of our residential mortgage servicing assets.

The amortization of residential mortgage servicing assets for December 31, 2020, as shown in the table above, is recorded as a reduction to contractual fee income. The contractual fee income from servicing residential mortgage loans totaled $ 34 million for the year ended December 31, 2020, $ 21 million for the year ended December 31, 2019, and $ 14 million for the year ended December 31, 2018. This fee income was offset by $ 14 million of amortization for the year ended December 31, 2020, $ 6 million for the year ended December 31, 2019, and $ 4 million for the year ended December 31, 2018. Both the contractual fee income and the amortization are recorded, net, in “consumer mortgage income” on the income statement.
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10. Leases

As a lessee, we enter into leases of land, buildings, and equipment. Our real estate leases primarily relate to bank branches and office space. The leases of equipment principally relate to technology assets for data processing and data storage. As a lessor, we primarily provide financing through our equipment leasing business.

Lessee

Our leases are classified as either operating or financing and have remaining terms ranging from 1 to 20 years with the exception of certain ground leases that have terms over 30 years. For leases with initial terms greater than one year, a lease liability, measured as the present value of unpaid lease payments, and a corresponding right-of-use asset for the right to use the leased properties are reported on the balance sheet. Lease payments are discounted using Key’s incremental borrowing rate, consistent with what Key would pay to borrow on a collateralized basis over a term similar to each lease. Leases with an initial term of less than one year are not recorded on the balance sheet. The related expense is recognized on a straight-line basis over the lease term.

Certain leases contain options to extend the lease term for up to five years . Some leases give us the option to terminate, for a penalty or at the lessor's discretion. Leases with variable payments are primarily based on adjustments for inflation over the term of the lease based on a contractually defined index. Certain ATM leases include variable payments based on volume of transactions.

Operating lease expense is recognized in "net occupancy" and "equipment" on the income statement. The components of lease expense are summarized as follows:
in millions December 31, 2020 December 31, 2019
Operating lease cost $ 135 $ 136
Finance lease cost:
Amortization of right-of-use assets 2 2
Interest on lease liabilities 1 1
Variable lease cost 20 24
Total lease cost (a)
$ 158 $ 163
(a) Short-term lease cost was less than $ 1 million for both the twelve months ended December 31, 2020.and the twelve months ended December 31, 2019

Cash flows related to leases are summarized as follows:
in millions December 31, 2020 December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases $ 1 $ 1
Operating cash flows from operating leases 143 146
Financing cash flows from finance leases 2 2
Right-of-use assets obtained in exchange for lease obligations: (a)
Operating leases $ 86 $ 81
Net gain recognized from sale leaseback transaction (b)
$ — $ 14
Finance leases —
(a) There were no right-of-use assets obtained in exchange for finance lease obligations for either the twelve months ended December 31, 2020 or the Twelve months ended December 31, 2019.
(b) During the third quarter of 2019, we entered into a sale leaseback transaction related to one branch which resulted in total proceeds of $ 16 million.

Additional balance sheet information related to leases is summarized as follows:
in millions Balance sheet classification December 31, 2020 December 31, 2019
Operating lease assets Accrued income and other assets $ 630 $ 654
Operating lease liabilities Accrued expense and other liabilities 711 748
Finance leases:
Property and equipment, gross Premises and equipment 28 28
Accumulated depreciation Premises and equipment ( 19 ) ( 17 )
Property and equipment, net 9 11
Finance lease liabilities Long-term debt 11 13

Information pertaining to the lease term and weighted-average discount rate is summarized as follows:
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December 31, 2020 December 31, 2019
Weighted-average remaining lease term:
Operating leases 7.09 7.50
Finance leases 5.03 6.06
Weighted-average discount rate:
Operating leases 3.01 % 3.26 %
Finance leases 3.94 % 3.94 %

Maturities of lease liabilities are summarized as follows:
in millions Operating Leases Finance Leases Total
2021 $ 140 $ 3 $ 143
2022 131 3 134
2023 116 2 118
2024 97 1 98
2025 79 1 80
Thereafter 233 3 236
Total lease payments 796 13 809
Less imputed interest 85 2 87
Total $ 711 $ 11 $ 722

Lessor Equipment Leasing

Leases may have fixed or floating rate terms. Variable payments are based on an index or other specified rate and are included in rental payments. Certain leases contain an option to extend the lease term or the option to terminate at the discretion of the lessee. Under certain conditions, lease agreements may also contain the option for a lessee to purchase the underlying asset.

Interest income from sales-type and direct financing leases is recognized in "interest income — loans" on the statement of income. Income related to operating leases is recognized in “operating lease income and other leasing gains” on the income statement. The components of equipment leasing income are summarized in the table below:
in millions December 31, 2020 December 31, 2019
Sales-type and direct financing leases
Interest income on lease receivable $ 119 $ 121
Interest income related to accretion of unguaranteed residual asset ( 3 ) 13
Interest income on deferred fees and costs — —
Total sales-type and direct financing lease income 116 134
Operating leases
Operating lease income related to lease payments 136 133
Other operating leasing gains 31 28
Total operating lease income and other leasing gains 167 161
Total lease income $ 283 $ 295

Equipment leasing receivables relate to sales-type and direct financing leases. The composition of the net investment in sales-type and direct financing leases is as follows:
in millions December 31, 2020 December 31, 2019
Lease receivables $ 3,570 $ 3,792
Unearned income ( 257 ) ( 329 )
Unguaranteed residual value 478 490
Deferred fees and costs 8 16
Net investment in sales-type and direct financing leases $ 3,799 $ 3,969

The residual value component of a lease represents the fair value of the leased asset at the end of the lease term. We rely on industry data, historical experience, independent appraisals and the experience of the equipment leasing asset management team to value lease residuals. Relationships with a number of equipment vendors give the asset management team insight into the life cycle of the leased equipment, pending product upgrades and competing products. Effective January 1, 2019, as a result of the implementation of ASU 2016-02, Key assesses net investments in leases, including residual values, for impairment and recognizes any impairment losses in accordance with the impairment guidanc e for financial instruments. The carrying amount of residual assets covered by residual value guarantees at December 31, 2020, and December 31, 2019, was $ 269 million and $ 289 million, respectively.
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At December 31, 2020, minimum future lease payments to be received for sales-type and direct financing leases are as follows:
in millions Sales-type and direct financing lease payments
2021 $ 1,085
2022 838
2023 573
2024 371
2025 226
Thereafter 477
Total lease payments $ 3,570

At December 31, 2020 , minimum future lease payments to be received for operating leases are as follows:
in millions Operating lease payments
2021 $ 122
2022 106
2023 88
2024 76
2025 63
Thereafter 126
Total lease payments $ 581

The carrying amount of operating lease assets at December 31, 2020 and December 31, 2019, was $ 859 million and $ 941 million, respectively.

11. Premises and Equipment

Premises and Equipment

Premises and equipment at December 31, 2020, and December 31, 2019, consisted of the following:
December 31,
dollars in millions
Useful life (in years)
2020 2019
Land Indefinite $ 126 $ 128
Buildings and improvements
15 - 40
722 729
Leasehold improvements
1 - 15
631 620
Furniture and equipment
2 - 15
843 872
Capitalized building leases
1 - 14 (a)
28 28
Construction in process N/A 44 48
Total premises and equipment 2,394 2,425
Less: Accumulated depreciation and amortization ( 1,641 ) ( 1,611 )
Premises and equipment, net $ 753 $ 814
(a) Capitalized building and equipment leases are amortized over the lesser of the useful life of asset or lease term.

Depreciation and amortization expense related to premises and equipment for the years ended December 31, 2020, December 31, 2019, and December 31, 2018 was $ 115 million, $ 118 million, and $ 131 million, respectively. This includes amortization of assets under capital leases.

Software

Eligible costs related to computer software developed or obtained for internal use that add functionality, improve efficiency or extend the useful life of a system are capitalized. Amortization of capitalized software begins when it is ready for its intended use, which is after all substantial testing is completed. Capitalized costs are amortized using the straight-line or accelerated method over its useful life. Balances are included in “Accrued income and other assets”.

Key had capitalized software assets, including internally-developed and purchased software and costs associated with certain cloud computing arrangements of $ 385 million and $ 910 million and related accumulated amortization of $ 183 million and $ 756 million as of December 31, 2020 and December 31, 2019, respectively. This includes in-
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process software that has not started amortizing. Amortization expense related to internal-use software for the years ended December 31, 2020, December 31, 2019, and December 31, 2018 was $ 49 million, $ 46 million, and $ 52 million, respectively.
12. Goodwill and Other Intangible Assets
Our annual goodwill impairment testing is performed as of October 1 each year, or more frequently as events occur or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. Additional information pertaining to our accounting policy for goodwill and other intangible assets is summarized in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Goodwill and Other Intangible Assets.”
During 2020, there was deterioration in the market and disruption resulting from the COVID-19 pandemic, which impacted Key’s market capitalization. We conducted a quantitative interim impairment test as of September 30, 2020, and concluded goodwill was not impaired.
As a result of that interim test, we determined that the estimated fair value of the Consumer Bank reporting unit was 11 % greater than its carrying amount, the estimated fair value of the Commercial Bank reporting unit was 17 % greater than its carrying amount and the estimated fair value of the Institutional Bank reporting unit, which is aggregated in the Commercial Bank reporting segment, was 11 % greater than its carrying amount. The fair values of each reporting unit were estimated using a combination of income and market approaches. The income approach utilized discounted cash flow projections for each reporting unit. The market approach consisted primarily of public company metrics but also considered recent transactions in the financial services industry. The carrying amounts of Key’s reporting units represent the average equity based on risk-weighted regulatory capital for goodwill impairment testing and management reporting purposes.
For our annual test, we conducted a qualitative analysis as of October 1, 2020, and concluded goodwill was not impaired. We reviewed and evaluated various qualitative factors such as financial and stock performance, market capitalization, internal forecasts and economic indicators. We will continue to monitor for impairment as appropriate.
During 2019, Key performed a quantitative annual test but it was not necessary to perform further reviews of goodwill in interim periods.
Changes in the carrying amount of goodwill by reporting segment are presented in the following table:
in millions Consumer Bank Commercial Bank Total
BALANCE AT DECEMBER 31, 2018 $ 2,102 $ 414 $ 2,516
Reallocation of goodwill ( 498 ) 498 —
Laurel Road acquisition 148 — 148
BALANCE AT DECEMBER 31, 2019 1,752 912 2,664
BALANCE AT DECEMBER 31, 2020 $ 1,752 $ 912 $ 2,664

Additional information regarding the Laurel Road acquisition is provided in Note 15 (“Acquisitions, Divestiture, and Discontinued Operations”). Additional information regarding the above reallocation of goodwill is provided in Note 25 (“Business Segment Reporting”).
As of December 31, 2020, we expect goodwill in the amount of $ 517 million to be deductible for tax purposes in future periods.
There were no accumulated impairment losses related to any of Key’s reporting units at December 31, 2020, December 31, 2019, and December 31, 2018.
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The following table shows the gross carrying amount and the accumulated amortization of intangible assets subject to amortization:
2020 2019
December 31,
in millions
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
Intangible assets subject to amortization:
Core deposit intangibles $ 355 $ 236 $ 355 $ 193
PCCR intangibles 16 12 152 145
Other intangible assets 105 40 115 31
Total $ 476 $ 288 $ 622 $ 369
The following table presents estimated intangible asset amortization expense for the next five years.
Estimated
in millions 2021 2022 2023 2024 2025
Intangible asset amortization expense $ 62 $ 57 $ 51 $ 28 $ 19

13. Variable Interest Entities

A VIE is a partnership, limited liability company, trust, or other legal entity that meets any one of the following criteria:
• The entity does not have sufficient equity to conduct its activities without additional subordinated financial support from another party.
• The entity’s investors lack the power to direct the activities that most significantly impact the entity’s economic performance.
• The entity’s equity at risk holders do not have the obligation to absorb losses or the right to receive residual returns.
• The voting rights of some investors are not proportional to their economic interests in the entity, and substantially all of the entity’s activities involve, or are conducted on behalf of, investors with disproportionately few voting rights.

Our significant VIEs are summarized below. We define a “significant interest” in a VIE as a subordinated interest that exposes us to a significant portion, but not the majority, of the VIE’s expected losses or residual returns, even though we do not have the power to direct the activities that most significantly impact the entity’s economic performance.

LIHTC investments. Through KCDC, we have made investments directly and indirectly in LIHTC operating partnerships formed by third parties. As a limited partner in these operating partnerships, we are allocated tax credits and deductions associated with the underlying properties. We have determined that we are not the primary beneficiary of these investments because the general partners have the power to direct the activities that most significantly influence the economic performance of their respective partnerships and have the obligation to absorb expected losses and the right to receive residual returns. As we are not the primary beneficiary of these investments, we do not consolidate them.

Our maximum exposure to loss in connection with these partnerships consists of our unamortized investment balance plus any unfunded equity commitments and tax credits claimed but subject to recapture. We had $ 1.4 billion and $ 1.5 billion of investments in LIHTC operating partnerships at December 31, 2020, and December 31, 2019, respectively. These investments are recorded in “accrued income and other assets” on our balance sheet. We do not have any loss reserves recorded related to these investments because we believe the likelihood of any loss is remote. For all legally binding unfunded equity commitments, we increase our recognized investment and recognize a liability. As of December 31, 2020, and December 31, 2019, we had liabilities of $ 484 million and $ 546 million, respectively, related to investments in qualified affordable housing projects, which are recorded in “accrued expense and other liabilities” on our balance sheet. We continue to invest in these LIHTC operating partnerships.

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The assets and liabilities presented in the table below convey the size of KCDC’s direct and indirect investments at December 31, 2020, and December 31, 2019. As these investments represent unconsolidated VIEs, the assets and liabilities of the investments themselves are not recorded on our balance sheet.
Unconsolidated VIEs
in millions
Total
Assets
Total
Liabilities
Maximum
Exposure to Loss
December 31, 2020
LIHTC investments $ 6,914 $ 2,765 $ 1,823
December 31, 2019
LIHTC investments $ 6,405 $ 2,526 $ 1,846

We amortize our LIHTC investments over the period that we expect to receive the tax benefits. In 2020, we recognized $ 195 million of amortization and $ 177 million of tax credits associated with these investments within “income taxes” on our income statement. In 2019, we recognized $ 187 million of amortization and $ 184 million of tax credits associated with these investments within “income taxes” on our income statement.

Principal investments. Through our principal investing entity, KCC, we have made investments in private equity funds engaged in venture- and growth-oriented investing. As a limited partner to these funds, KCC records these investments at fair value and receives distributions from the funds in accordance with the funds’ partnership agreements. We are not the primary beneficiary of these investments as we do not hold the power to direct the activities that most significantly affect the funds’ economic performance. Such power rests with the funds’ general partners. In addition, we neither have the obligation to absorb the funds’ expected losses nor the right to receive their residual returns. Our voting rights are also disproportionate to our economic interests, and substantially all of the funds’ activities are conducted on behalf of investors with disproportionately few voting rights. Because we are not the primary beneficiary of these investments, we do not consolidate them.

Our maximum exposure to loss associated with indirect principal investments consists of the investments’ fair value plus any unfunded equity commitments. The fair value of our indirect principal investments totaled $ 53 million and $ 68 million at December 31, 2020, and December 31, 2019, respectively. These investments are recorded in “other investments” on our balance sheet. Additional information on indirect principal investments is provided in Note 6 (“Fair Value Measurements”). The table below reflects the size of the private equity funds in which KCC was invested as well as our maximum exposure to loss in connection with these investments at December 31, 2020.
Unconsolidated VIEs
in millions
Total
Assets
Total
Liabilities
Maximum
Exposure to Loss
December 31, 2020
Indirect investments $ 10,899 $ 168 $ 69
December 31, 2019
Indirect investments $ 12,954 $ 205 $ 89

Through our principal investing entities, we have formed and funded operating entities that provide management and other related services to our investment company funds, which directly invest in portfolio companies. In return for providing services to our direct investment funds, these entities’ receive a minority equity interest in the funds. This minority equity ownership is recorded at fair value on the entities’ financial statements. Additional information on our direct principal investments is provided in Note 6 (“Fair Value Measurements”). While other equity investors manage the daily operations of these entities, we retain the power, through voting rights, to direct the activities of the entities that most significantly impact their economic performance. In addition, we have the obligation to absorb losses and the right to receive residual returns that could potentially be significant to these entities. As a result, we have determined that we are the primary beneficiary of these funds and have consolidated them since formation. The entities had no liabilities at December 31, 2020, and December 31, 2019, and other equity investors have no recourse to our general credit.

Other unconsolidated VIEs. We are involved with other various entities in the normal course of business which we have determined to be VIEs. We have determined that we are not the primary beneficiary of these VIEs because we do not have the power to direct the activities that most significantly impact their economic performance. Our assets associated with these unconsolidated VIEs totaled $ 351 million at December 31, 2020, and $ 282 million at December 31, 2019. These assets are recorded in “accrued income and other assets,” “other investments,”
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“securities available for sale,” and “loans, net of unearned income” on our balance sheet. We had liabilities totaling $ 1 million associated with these unconsolidated VIEs at December 31, 2020, and $ 1 million at December 31, 2019. These liabilities are recorded in “accrued expenses and other liabilities” on our balance sheet. We have excluded certain transactions with unconsolidated VIEs from the balances above where we determine our continuing involvement is not significant.  In addition, where we only have a lending arrangement in the normal course of business with unconsolidated VIEs we present the balances related to the lending arrangements in Note 5 (“Asset Quality”).
14. Income Taxes
Income taxes included in the income statement are summarized below. We file a consolidated federal income tax return.
Year ended December 31,
in millions
2020 2019 2018
Currently payable:
Federal $ 336 $ 241 $ 184
State 83 20 62
Total currently payable 419 261 246
Deferred:
Federal ( 156 ) 34 117
State ( 36 ) 19 ( 19 )
Total deferred ( 192 ) 53 98
Total income tax (benefit) expense (a)
$ 227 $ 314 $ 344
(a) There was income tax (benefit) expense on securities transactions of $ 1 million in 2020, a $ 5 million in 2019 and no income tax (benefit) expense on securities transactions 2018. Income tax expense excludes equity- and gross receipts-based taxes, which are assessed in lieu of an income tax in certain states in which we operate. These non-income taxes, which are recorded in “noninterest expense” on the income statement, totaled $ 30 million in 2020, $ 23 million in 2019, and $ 15 million in 2018.

On December 22, 2017, the TCJ Act was signed into law. This comprehensive tax legislation provided for significant changes to the U.S. Internal Revenue Code of 1986, as amended, that impacted corporate taxation requirements such as the reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018.

During 2018, we completed and filed our 2017 federal income tax return and management finalized its assessment of the initial impact of the TCJ Act, recorded in 2017, and related regulatory guidance. As a result, our income tax provision was increased by $ 7 million.

Significant components of our deferred tax assets and liabilities included in “accrued expense and other liabilities” on the balance sheet, are as follows:
December 31,
in millions
2020 2019
Allowance for loan and lease losses $ 443 $ 236
Employee benefits 166 164
Federal net operating losses and credits 7 81
Fair value adjustments — 21
Non-tax accruals 76 61
Operating lease liabilities (a)
174 178
State net operating losses and credits 1 1
Other 297 245
Gross deferred tax assets 1,164 987
Less: Valuation Allowance — —
Total deferred tax assets 1,164 987
Leasing transactions 556 628
Net unrealized securities gains 340 117
Operating lease right-of-use assets (a)
153 156
Other 215 175
Total deferred tax liabilities 1,264 1,076
Net deferred tax assets (liabilities) (b)
$ ( 100 ) $ ( 89 )
(a) A separate deferred tax asset and liability is recognized for each operating lease item resulting from the adoption of ASC 842 in 2019.
(b) From continuing operations.


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We conduct quarterly assessments of all available evidence to determine the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded. The available evidence used in connection with these assessments includes taxable income in prior periods, projected future taxable income, potential tax-planning strategies, and projected future reversals of deferred tax items. These assessments involve a degree of subjectivity and may undergo significant change. Based on these criteria, we have no recorded valuation allowances at December 31, 2020.

At December 31, 2020, we had federal net operating loss carryforwards of $ 26 million and federal credit carryforwards of $ 1 million. The federal net operating loss carryforwards are from prior acquisitions by First Niagara and are subject to annual limitations under the tax code and, if not utilized, will expire in the years beginning 2027. The federal credit carryforward consists of general business credits which expire in 2037, under the Internal Revenue Code. We currently expect to fully utilize these losses and credits.

We had state net operating loss carryforwards of $ 30 million, resulting in a net state deferred tax asset of $ 1 million.
The following table shows how our total income tax expense (benefit) and the resulting effective tax rate were derived:
Year ended December 31,
dollars in millions
2020 2019 2018
Amount Rate Amount Rate Amount Rate
Income (loss) before income taxes times 21% statutory federal tax rate $ 327 21.0 % $ 425 21.0 % $ 463 21.0 %
Amortization of tax-advantaged investments 150 9.7 132 6.5 127 5.8
Foreign tax adjustments — — — — 2 .1
Tax-exempt interest income ( 28 ) ( 1.8 ) ( 30 ) ( 1.5 ) ( 30 ) ( 1.4 )
Corporate-owned life insurance income ( 29 ) ( 1.9 ) ( 29 ) ( 1.4 ) ( 29 ) ( 1.3 )
State income tax, net of federal tax benefit 37 2.4 31 1.5 34 1.5
Tax credits ( 218 ) ( 14.0 ) ( 231 ) ( 11.4 ) ( 234 ) ( 10.6 )
Tax Cuts and Jobs Act — — — — 7 .3
Other ( 12 ) ( .8 ) 16 .9 4 .2
Total income tax expense (benefit) $ 227 14.6 % $ 314 15.6 % $ 344 15.6 %

Liability for Unrecognized Tax Benefits
The change in our liability for unrecognized tax benefits is as follows:
Year ended December 31,
in millions 		2020 2019
Balance at beginning of year $ 19 $ 35
Increase for other tax positions of prior years 40 2
Decrease for payments and settlements — —
Decrease related to tax positions taken in prior years ( 1 ) ( 18 )
Balance at end of year $ 58 $ 19

Each quarter, we review the amount of unrecognized tax benefits recorded in accordance with the applicable accounting guidance. Any adjustment to unrecognized tax benefits is recorded in income tax expense. The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was $ 58 million at December 31, 2020, and $ 19 million at December 31, 2019. It is reasonably possible that the balance of unrecognized tax benefits could decrease in the next twelve months due to examinations by various tax authorities or the expiration of statutes of limitations.

As permitted under the applicable accounting guidance, it is our policy to record interest and penalties related to unrecognized tax benefits in income tax expense. We recorded net interest benefit of $ 0.2 million, $ 0.9 million, and $ 0.7 million in 2020, 2019, and 2018, respectively. We did no t recover any state tax penalties in 2020, 2019, or 2018. At December 31, 2020, we had an accrued interest payable of $ 3 million, compared to $ 2 million at December 31, 2019. There was no liability for accrued state tax penalties at December 31, 2020, and December 31, 2019.

At December 31, 2020 there were no unrecognized tax benefits presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, compared to $ 15.9 million at December 31, 2019.
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We file federal income tax returns, as well as returns in various state and foreign jurisdictions. We are subject to income tax examination by the IRS for the tax years 2016 and forward. Currently, we are not under IRS audit for any tax years. We are not subject to income tax examinations by other tax authorities for years prior to 2013.
Pre-1988 Bank Reserves acquired in a business combination
Retained earnings of KeyBank included approximately $ 92 million of allocated bad debt deductions for which no income taxes have been recorded. Under current federal law, these reserves are subject to recapture into taxable income if KeyBank, or any successor, fails to maintain its bank status under the Internal Revenue Code or makes non-dividend distributions or distributions greater than its accumulated earnings and profits. No deferred tax liability has been established as these events are not expected to occur in the foreseeable future.

15. Acquisitions, Divestiture, and Discontinued Operations

Acquisitions

Laurel Road Digital Lending Business. On April 3, 2019, KeyBank acquired Laurel Road's digital lending business from Laurel Road Bank. Laurel Road Bank's three bank branches located in southeast Connecticut were not part of this transaction. Through the acquisition, KeyBank expects to enhance its digital capabilities with state-of-the-art, customer-centric technology and to leverage Laurel Road's proven ability to attract and serve professional millennial clients. The acquisition is accounted for as a business combination. As a result of the acquisition, we recognized identifiable intangible assets with a fair value of $ 37 million and goodwill of $ 148 million. The valuation of the acquired assets and liabilities of Laurel Road was final at June 30, 2020.

Discontinued operations

Discontinued operations includes our government-guaranteed and private education lending business.  At December 31, 2020, and December 31, 2019, approximately $ 710 million and $ 865 million, respectively, of education loans are included in discontinued assets on the consolidated balance sheets. Net interest income after provision for credit losses for this business is not material and is included in income (loss) from discontinued operations, net of taxes on the consolidated statements of income.

16. Securities Financing Activities

The following table summarizes our securities financing agreements at December 31, 2020, and December 31, 2019:
December 31, 2020 December 31, 2019
in millions
Gross Amount
Presented in
Balance Sheet
Netting
Adjustments (a)
Collateral (b)
Net
Amounts
Gross Amount
Presented in
Balance Sheet
Netting
Adjustments (a)
Collateral (b)
Net
Amounts
Offsetting of financial assets:
Reverse repurchase agreements $ 6 $ ( 6 ) — — $ 5 $ ( 5 ) — —
Securities borrowed 500 — $ ( 500 ) — — — — —
Total $ 506 $ ( 6 ) $ ( 500 ) — $ 5 $ ( 5 ) — —
Offsetting of financial liabilities:
Repurchase agreements (c)
$ 220 $ ( 6 ) $ ( 214 ) — $ 187 $ ( 7 ) $ ( 180 ) —
Total $ 220 $ ( 6 ) $ ( 214 ) — $ 187 $ ( 7 ) $ ( 180 ) —
(a) Netting adjustments take into account the impact of master netting agreements that allow us to settle with a single counterparty on a net basis.
(b) These adjustments take into account the impact of bilateral collateral agreements that allow us to offset the net positions with the related collateral. The application of collateral cannot reduce the net position below zero. Therefore, excess collateral, if any, is not reflected above.
(c) Repurchase agreements are collateralized by mortgaged-backed agency securities and are contracted on an overnight or continuous basis.

As of December 31, 2020, the carrying amount of assets pledged as collateral against repurchase agreements totaled $ 232 million. Assets pledged as collateral are reported in “available for sale” and “held-to-maturity” securities on our balance sheet. At December 31, 2020, the liabilities associated with collateral pledged were solely comprised of customer sweep financing activity and had a carrying value of $ 214 million. The collateral pledged under customer sweep repurchase agreements is posted to a third-party custodian and cannot be sold or repledged by the secured party. The risk related to a decline in the market value of collateral pledged is minimal given the collateral's high credit quality and the overnight duration of the repurchase agreements.

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Like other financing transactions, securities financing agreements contain an element of credit risk. To mitigate and manage credit risk exposure, we generally enter into master netting agreements and other collateral arrangements that give us the right, in the event of default, to liquidate collateral held and to offset receivables and payables with the same counterparty.  Additionally, we establish and monitor limits on our counterparty credit risk exposure by product type. For the reverse repurchase agreements, we monitor the value of the underlying securities we received from counterparties and either request additional collateral or return a portion of the collateral based on the value of those securities. We generally hold collateral in the form of highly rated securities issued by the U.S. Treasury and fixed income securities. In addition, we may need to provide collateral to counterparties under our repurchase agreements. With the exception of collateral pledged against customer sweep repurchase agreements, the collateral we pledge and receive can generally be sold or repledged by the secured parties.
17. Stock-Based Compensation
We maintain several stock-based compensation plans, which are described below. Total compensation expense for these plans was $ 101 million for 2020, $ 96 million for 2019, and $ 99 million for 2018. The total income tax benefit recognized in the income statement for these plans was $ 24 million for 2020, $ 23 million for 2019, and $ 23 million for 2018.
Our compensation plans allow us to grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, or other awards which may be denominated or payable in or valued by reference to our Common Shares or other factors, discounted stock purchases, and deferred compensation to eligible employees and directors. At December 31, 2020, we had 47,287,594 Common Shares available for future grant under our compensation plans. In accordance with a resolution adopted by the Compensation and Organization Committee of KeyCorp’s Board of Directors, we may not grant options to purchase Common Shares, restricted stock or other shares under any long-term compensation plan in an aggregate amount that exceeds 6 % of our outstanding Common Shares in any rolling three-year period.
Stock Options
Stock options granted to employees generally become exercisable at the rate of 25 % per year. No option granted by KeyCorp will be exercisable less than one year after, or expire later than ten years from, the grant date. The exercise price is the closing price of our Common Shares on the grant date (or the prior business day if the grant date is not a business day).
We determine the fair value of options granted using the Black-Scholes option-pricing model. This model was originally developed to determine the fair value of exchange-traded equity options, which (unlike employee stock options) have no vesting period or transferability restrictions. Because of these differences, the Black-Scholes model does not precisely value an employee stock option, but it is commonly used for this purpose. The model assumes that the estimated fair value of an option is amortized as compensation expense over the option’s vesting period.
The Black-Scholes model requires several assumptions, which we developed and update based on historical trends and current market observations. Our determination of the fair value of options is only as accurate as the underlying assumptions. The assumptions pertaining to options issued during 2020, 2019, and 2018 are shown in the following table.
Year ended December 31, 2020 2019 2018
Average option life 6.5 years 6.5 years 6.5 years
Future dividend yield 3.90 % 3.88 % 2.28 %
Historical share price volatility .267 .266 .282
Weighted-average risk-free interest rate 1.3 % 2.5 % 2.8 %
In 2019, shareholders approved the 2019 Equity Compensation Plan, under which 71,600,000 shares may be issued as equity awards. The Compensation and Organization Committee has authority to approve all stock option grants but may delegate some of its authority to grant awards from time to time. The committee has delegated to our Chief Executive Officer the authority to grant equity awards, including stock options, to any employee who is not designated an “officer” for purposes of Section 16 of the Exchange Act. No more than 3,000,000 Common Shares may be issued under this authority.

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The following table summarizes activity, pricing and other information for our stock options for the year ended December 31, 2020:
Number of
Options
Weighted-Average
Exercise Price Per
Option
Weighted-Average
Remaining Life
Aggregate
Intrinsic
Value (a)
Outstanding at December 31, 2019 6,685,808 $ 13.32 5.2 years $ 47
Granted 549,170 19.03
Exercised ( 821,916 ) 10.37
Lapsed or canceled ( 40,378 ) 15.25
Outstanding at December 31, 2020 6,372,684 $ 14.18 4.6 21
Expected to vest 1,426,063 18.75 7.1 —
Exercisable at December 31, 2020 4,867,838 $ 12.77 3.8 $ 21
(a) The intrinsic value of a stock option is the amount by which the fair value of the underlying stock exceeds the exercise price of the option.
The weighted-average grant-date fair value of options was $ 2.96 for options granted during 2020, $ 3.07 for options granted during 2019, and $ 5.12 for options granted during 2018. Stock option exercises numbered 821,916 in 2020, 2,039,208 in 2019, and 1,960,444 in 2018. The aggregate intrinsic value of exercised options was $ 5 million for 2020, $ 18 million for 2019, and $ 21 million for 2018. As of December 31, 2020, unrecognized compensation cost related to nonvested options under the plans totaled $ 1 million. We expect to recognize this cost over a weighted-average period of 2.5 years.
Cash received from options exercised was $ 8 million, $ 18 million, and $ 20 million in 2020, 2019, and 2018, respectively. The actual tax benefit realized for the tax deductions from options exercised totaled less than $ 1 million for 2020 and $ 1 million for both 2019 and 2018.
Long-Term Incentive Compensation Program
Our Long-Term Incentive Compensation Program (the “Program”) rewards senior executives and other employees critical to our long-term financial success. Awards are granted annually in a variety of forms:
• deferred cash payments that generally vest and are payable at the rate of 25 % per year;
• time-lapsed (service condition) restricted stock units payable in stock, which generally vest at the rate of 25 % per year;
• performance units payable in stock, which vest at the end of the three-year performance cycle and will not vest unless Key attains defined performance levels and the service condition is met; and
• performance units payable in cash, which vest at the end of the three-year performance cycle and will not vest unless Key attains defined performance levels and the service condition is met.
During 2020, the total of performance units vested that were payable in stock and cash numbered 421,352 and 654,108 , respectively. The total fair value of the performance units vested during 2020 that were payable in stock and cash was $ 8 million and $ 13 million, respectively. During 2019, the performance units vested that were payable in stock and cash numbered 855,233 and 1,139,582 , respectively. The total fair value of the performance units vested during 2019 that were payable in stock and cash was $ 9 million and $ 20 million, respectively.

The following table summarizes activity and pricing information for the nonvested shares in the Program for the year ended December 31, 2020.
Vesting Contingent on
Service Conditions
Vesting Contingent on
Performance and Service
Conditions - Payable in Stock
Vesting Contingent on
Performance and Service
Conditions - Payable in Cash
Number of
Nonvested
Shares
Weighted-
Average
Grant-Date
Fair Value
Number of
Nonvested
Shares
Weighted-
Average
Grant-Date
Fair Value
Number of
Nonvested
Shares 		Weighted-
Average
Grant-Date
Fair Value
Outstanding at December 31, 2019 10,296,394 $ 17.73 491,189 $ 18.87 $ 3,899,884 $ 20.37
Granted 5,796,992 19.40 ( 10,666 ) 18.98 1,651,519 16.16
Vested ( 4,203,663 ) 16.33 ( 421,352 ) 18.96 ( 654,108 ) 19.46
Forfeited ( 373,353 ) 19.16 — — ( 117,256 ) 13.16
Outstanding at December 31, 2020 11,516,370 $ 19.01 59,171 $ 18.20 $ 4,780,039 $ 16.23
The compensation cost of time-lapsed and performance-based restricted stock or unit awards granted under the Program is calculated using the closing trading price of our Common Shares on the grant date (or the prior business day if the grant date is not a business day).
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Unlike time-lapsed and performance-based restricted stock or units, we do not pay dividends during the vesting period for performance shares or units that may become payable in excess of targeted performance.
The weighted-average grant-date fair value of awards granted under the Program was $ 18.68 during 2020, $ 18.25 during 2019, and $ 19.28 during 2018. As of December 31, 2020, unrecognized compensation cost related to nonvested shares under the Program totaled $ 88 million. We expect to recognize this cost over a weighted-average period of 2.3 years. The total fair value of shares vested was $ 89 million in 2020, $ 89 million in 2019, and $ 93 million in 2018.
Deferred Compensation and Other Restricted Stock Awards
Our deferred compensation arrangements include voluntary and mandatory deferral programs for Common Shares awarded to certain employees and directors. Mandatory deferred incentive awards vest at the rate of 25 % per year beginning one year after the deferral date. Deferrals under the voluntary programs are immediately vested.
We also may grant, upon approval by the Compensation and Organization Committee (or our Chief Executive Officer with respect to their delegated authority), other time-lapsed restricted stock or unit awards under various programs to recognize outstanding performance.
The following table summarizes activity and pricing information for the nonvested shares granted under our deferred compensation plans and these other restricted stock or unit award programs for the year ended December 31, 2020.
Number of
Nonvested
Shares
Weighted-Average
Grant-Date
Fair Value
Outstanding at December 31, 2019 3,037,964 $ 17.67
Granted 691,377 16.22
Dividend equivalents 11 13.91
Vested ( 1,048,864 ) 17.18
Forfeited ( 108,401 ) 18.20
Outstanding at December 31, 2020 2,572,087 $ 17.46
The weighted-average grant-date fair value of awards granted was $ 16.22 during 2020, $ 17.57 during 2019, and $ 20.77 during 2018. As of December 31, 2020, unrecognized compensation cost related to nonvested shares granted under our deferred compensation plans and the other restricted stock or unit award programs totaled $ 13 million. We expect to recognize this cost over a weighted-average period of 3.9 years. The total fair value of shares vested was $ 18 million in 2020, $ 19 million in 2019, and $ 22 million in 2018. Dividend equivalents presented in the preceding table represent the value of dividends accumulated during the vesting period.
Discounted Stock Purchase Plan
Our Discounted Stock Purchase Plan provides employees the opportunity to purchase our Common Shares at a 10 % discount through payroll deductions or cash payments. Purchases are limited to $ 10,000 in any month and $ 50,000 in any calendar year, and are immediately vested. To accommodate employee purchases, we issue treasury shares on or around the fifteenth day of the month following the month employee payments are received. We issued 500,508 Common Shares at a weighted-average cost to employees of $ 11.76 during 2020, 327,243 Common Shares at a weighted-average cost to employees of $ 15.73 during 2019, and 327,435 Common Shares at a weighted-average cost to employees of $ 17.48 during 2018.
Information pertaining to our method of accounting for stock-based compensation is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Stock-Based Compensation.”
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18. Employee Benefits
Pension Plans
Key maintains a cash balance pension plan and other defined benefit plans. These plans are frozen and closed to new employees. We continue to credit participants’ existing account balances for interest until they receive their plan benefits. Plans provide benefits based upon length of service and compensation levels.
Key utilizes its fiscal year-end as the measurement date for its pension and other postretirement employee benefit plans. Actuarial gains and losses are deferred and amortized over the future service periods of active employees. We determine the expected return on plan assets using a calculated market-related value of plan assets. Gain or loss amounts in AOCI are only amortized to the extent that they exceed 10% of the greater of the market-related value or the projected benefit obligation.
Pre-tax AOCI not yet recognized as net pension cost was $ 427 million at December 31, 2020, and $ 471 million at December 31, 2019, consisting entirely of net unrecognized losses.
During 2020, 2019, and 2018, we recognized a settlement loss for lump sum payments made under certain pension plans. In accordance with the applicable accounting guidance for defined benefit plans, we performed a remeasurement of the affected plans in conjunction with the settlement and recognized the settlement loss as reflected in the following table.
The components of net pension cost and the amount recognized in OCI for all funded and unfunded plans are as follows:
Year ended December 31,
in millions
2020 2019 2018
Interest cost on PBO $ 34 $ 46 $ 41
Expected return on plan assets ( 38 ) ( 48 ) ( 53 )
Amortization of losses 17 13 17
Settlement loss 9 18 17
Net pension cost $ 22 $ 29 $ 22
Other changes in plan assets and benefit obligations recognized in OCI:
Net (gain) loss $ ( 18 ) $ ( 8 ) $ 20
Amortization of gains ( 26 ) ( 31 ) ( 33 )
Total recognized in comprehensive income $ ( 44 ) $ ( 39 ) $ ( 13 )
Total recognized in net pension cost and comprehensive income $ ( 22 ) $ ( 10 ) $ 9

The information related to our pension plans presented in the following tables is based on current actuarial reports using measurement dates of December 31, 2020, and December 31, 2019.

The following table summarizes changes in the PBO related to our pension plans. Actuarial losses in 2020 were primarily a result of the decrease in discount rate, offset by a gain from the decrease in interest crediting rates.
Year ended December 31,
in millions
2020 2019
PBO at beginning of year $ 1,233 $ 1,201
Interest cost 34 46
Actuarial losses (gains) 66 91
Benefit payments ( 85 ) ( 105 )
PBO at end of year $ 1,248 $ 1,233










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The following table summarizes changes in the FVA.
Year ended December 31,
in millions
2020 2019
FVA at beginning of year $ 1,102 $ 1,046
Actual return on plan assets 123 147
Employer contributions 13 14
Benefit payments ( 85 ) ( 105 )
FVA at end of year $ 1,153 $ 1,102
The following table summarizes the funded status of the pension plans, which equals the amounts recognized in the balance sheets at December 31, 2020, and December 31, 2019.
December 31,
in millions
2020 2019
Funded status (a)
$ ( 95 ) $ ( 131 )
Net prepaid pension cost recognized consists of:
Noncurrent assets $ 81 48
Current liabilities ( 14 ) $ ( 14 )
Noncurrent liabilities ( 162 ) ( 165 )
Net prepaid pension cost recognized (b)
$ ( 95 ) $ ( 131 )
(a) The shortage of the FVA under the PBO.
(b) Represents the accrued benefit liability of the pension plans.
At December 31, 2020, our primary qualified cash balance pension plan was sufficiently funded under the requirements of ERISA. Consequently, we are not required to make a minimum contribution to that plan in 2021. We also do not expect to make any significant discretionary contributions during 2021.
At December 31, 2020, we expect to pay the benefits from all funded and unfunded pension plans as follows: 2021 — $ 92 million; 2022— $ 91 million; 2023 — $ 89 million; 2024 — $ 87 million; 2025 — $ 84 million and $ 371 million in the aggregate from 2026 through 2030.
The ABO for all of our pension plans was $ 1.2 billion at December 31, 2020, and $ 1.2 billion at December 31, 2019. As indicated in the table below, collectively our plans had an ABO in excess of plan assets as follows:
December 31, 2020 2019
in millions Cash Balance Pension Plan Other Defined Benefit Plans Cash Balance Pension Plan Other Defined Benefit Plans
PBO $ 1,072 $ 176 $ 1,054 $ 179
ABO 1,072 176 1,054 179
Fair value of plan assets 1,153 — 1,102 —

To determine the actuarial present value of benefit obligations, we assumed the following weighted-average rates.
December 31, 2020 2019
Discount rate 2.05 % 2.89 %
Compensation increase rate N/A N/A
Weighted-average interest crediting rate 1.65 % 2.39 %
To determine net pension cost, we assumed the following weighted-average rates.
Year ended December 31,
2020 2019 2018
Discount rate
2.89 % 4.00 % 3.25 %
Compensation increase rate
N/A N/A N/A
Expected return on plan assets
3.75 4.50 4.75
We estimate that we will recognize $ 15 million in net pension cost for 2021, compared to net pension cost of $ 22 million in 2020 and $ 29 million for 2019.
We estimate that a 25 basis point increase or decrease in the expected return on plan assets would change our net pension cost for 2021 by approximately $ 3 million. Pension cost also is affected by an assumed discount rate. We estimate that a 25 basis point change in the assumed discount rate would change net pension cost for 2021 by approximately $ 2 million.
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The expected return on plan assets is determined by considering a number of factors, the most significant of which are:
• Our expectations for returns on plan assets over the long term, weighted for the investment mix of the assets. These expectations consider, among other factors, historical capital market returns of equity, fixed income, convertible, and other securities, and forecasted returns that are modeled under various economic scenarios.
• Historical returns on our plan assets. Based on an annual reassessment of current and expected future capital market returns, our expected return on plan assets was 3.75 % for 2020, 4.5 % for 2019 and 4.75 % for 2018. We deemed a rate of 2.75 % to be appropriate in estimating 2020 pension cost.
The investment objectives of the pension fund are developed to reflect the characteristics of the plan, such as pension formulas, cash lump sum distribution features, and the liability profiles of the plan’s participants. An executive oversight committee reviews the plan’s investment performance at least quarterly, and compares performance against appropriate market indices. The pension fund’s investment objectives are to balance total return objectives with a continued management of plan liabilities, and to minimize the mismatch between assets and liabilities. These objectives are being implemented through liability driven investing and the adoption of a de-risking glide path. The following table shows the asset target allocations prescribed by the pension fund’s investment policies based on the plan’s funded status at December 31, 2020.
Target Allocation
Asset Class 2020
Equity securities:
U.S. 4 %
International 2
Fixed income securities 87
Real assets 4
Other assets 3
Total 100 %
Equity securities include common stocks of domestic and foreign companies, as well as foreign company stocks traded as American Depositary Shares on U.S. stock exchanges. Debt securities include investments in domestic- and foreign-issued corporate bonds, U.S. government and agency bonds, international government bonds, and mutual funds. Real assets include an investment in a diversified real asset strategy separate account designed to provide exposure to the three core real assets: Treasury Inflation-Protected Securities, commodities, and real estate. Other assets include investments in a multi-strategy investment fund and a limited partnership.
Although the pension funds’ investment policies conditionally permit the use of derivative contracts, we have not entered into any such contracts, and we do not expect to employ such contracts in the future.
The valuation methodologies used to measure the fair value of pension plan assets vary depending on the type of asset, as described below. For an explanation of the fair value hierarchy, see Note 1 (“Summary of Significant Accounting Policies”) under the heading “Fair Value Measurements.”
Equity securities. Equity securities traded on securities exchanges are valued at the closing price on the exchange or system where the security is principally traded. These securities are classified as Level 1 since quoted prices for identical securities in active markets are available.
Debt securities. Substantially all debt securities are investment grade and include domestic- and foreign-issued corporate bonds and U.S. government and agency bonds. These securities are valued using evaluated prices based on observable inputs, such as dealer quotes, available trade information, spreads, bids and offers, prepayment speeds, U.S. Treasury curves, and interest rate movements. Debt securities are classified as Level 2.
Mutual funds. Exchange-traded mutual funds listed or traded on securities exchanges are valued at the closing price on the exchange or system where the security is principally traded. These securities are classified as Level 1 because quoted prices for identical securities in active markets are available.
Collective investment funds. Investments in collective investment funds are valued using the net asset value practical expedient and are not classified within the fair value hierarchy. Fair value is determined based on Key’s proportionate share of total net assets in the fund.
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Insurance investment contracts and pooled separate accounts. Deposits under insurance investment contracts and pooled separate accounts with insurance companies do not have readily determinable fair values and are valued using a methodology that is consistent with accounting guidance that allows the plan to estimate fair value based upon net asset value per share (or its equivalent, such as member units or an ownership in partners’ capital to which a proportionate share of net assets is attributed); thus, these investments are not classified within the fair value hierarchy.
Other assets. Other assets include an investment in a multi-strategy investment fund and an investment in a limited partnership. These investments do not have readily determinable fair values and are valued using a methodology consistent with accounting guidance that allows the plan to estimate fair value based upon net asset value per share (or its equivalent, such as member units or an ownership in partners’ capital to which a proportionate share of net assets is attributed); thus, these investments are not classified within the fair value hierarchy.
The following tables show the fair values of our pension plan assets by asset class at December 31, 2020, and December 31, 2019.
December 31, 2020
in millions Level 1 Level 2 Level 3 Total
ASSET CLASS
Equity securities:
Common — U.S. $ 9 — — $ 9
Preferred — U.S. 3 — — 3
Debt securities:
Corporate bonds — U.S. — $ 171 — 171
Corporate bonds — International — 79 — 79
Government and agency bonds — U.S. — 165 — 165
Government bonds — International — 2 — 2
State and municipal bonds — 27 — 27
Mutual funds:
Equity — International 2 — — 2
Collective investment funds (measured at NAV) (a)
— — — 636
Insurance investment contracts and pooled separate accounts (measured at NAV) (a)
— — — 17
Other assets (measured at NAV) (a)
— — — 42
Total net assets at fair value $ 14 $ 444 — $ 1,153
(a) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets presented elsewhere within this footnote.
December 31, 2019
in millions Level 1 Level 2 Level 3 Total
ASSET CLASS
Equity securities:
Common — U.S. 8 — — 8
Common — International — — — —
Preferred — U.S. 3 — — 3
Debt securities:
Corporate bonds — U.S. — $ 155 — 155
Corporate bonds — International — 72 — 72
Government and agency bonds — U.S. — 190 — 190
Government bonds — International — 2 — 2
State and municipal bonds — 27 — 27
Mutual funds:
Equity — International 2 — — 2
Collective investment funds (measured at NAV) (a)
— — — 584
Insurance investment contracts and pooled separate accounts (measured at NAV) (a)
— — — 16
Other assets (measured at NAV) (a)
— — — 43
Total net assets at fair value $ 13 $ 446 — $ 1,102
(a) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets presented elsewhere within this footnote.
Other Postretirement Benefit Plans
We sponsor a retiree healthcare plan in which all employees age 55 with five years of service (or employees age 50 with 15 years of service who are terminated under conditions that entitle them to a severance benefit) are eligible to participate. Participant contributions are adjusted annually. Key may provide a subsidy toward the cost of coverage for certain employees hired before 2001 with a minimum of 15 years of service at the time of termination. We use a separate VEBA trust to fund the retiree healthcare plan.
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The components of pre-tax AOCI not yet recognized as net postretirement benefit cost are shown below.
December 31,
in millions 2020 2019
Net unrecognized losses (gains) $ ( 10 ) $ ( 10 )
Net unrecognized prior service credit ( 15 ) ( 17 )
Total unrecognized AOCI $ ( 25 ) $ ( 27 )
The components of net postretirement benefit cost and the amount recognized in OCI for all funded and unfunded plans are as follows:
December 31,
in millions 2020 2019 2018
Service cost of benefits earned $ — $ 1 $ 1
Interest cost on APBO 2 2 2
Expected return on plan assets ( 2 ) ( 2 ) ( 2 )
Amortization of prior service credit ( 1 ) — ( 1 )
Amortization of gains — ( 1 ) ( 1 )
Net postretirement benefit ( 1 ) — ( 1 )
Other changes in plan assets and benefit obligations recognized in OCI:
Net (gain) loss $ 1 $ 1 $ 1
Amortization of prior service credit — 1 1
Amortization of losses — — —
Total recognized in comprehensive income $ 1 $ 2 $ 2
Total recognized in net postretirement benefit cost and comprehensive income $ — $ 2 $ 1
The information related to our postretirement benefit plans presented in the following tables is based on current actuarial reports using measurement dates of December 31, 2020, and December 31, 2019.
The following table summarizes changes in the APBO. Actuarial losses are a result of asset performance.
Year ended December 31,
in millions 2020 2019
APBO at beginning of year $ 52 $ 63
Service cost — 1
Interest cost 2 2
Plan participants’ contributions 1 1
Actuarial losses (gains) 8 10
Benefit payments ( 11 ) ( 8 )
Plan amendments — ( 17 )
APBO at end of year $ 52 $ 52
The following table summarizes changes in FVA.
Year ended December 31,
in millions 2020 2019
FVA at beginning of year $ 52 $ 47
Employer contributions — —
Plan participants’ contributions 1 1
Benefit payments ( 11 ) ( 8 )
Actual return on plan assets 10 12
FVA at end of year $ 52 $ 52
The postretirement plans were fully funded at December 31, 2020, and December 31, 2019. Therefore, no liabilities were recognized on our balance sheet.
There are no regulations that require contributions to the VEBA trust that funds our retiree healthcare plan, so there is no minimum funding requirement. We are permitted to make discretionary contributions to the VEBA trust, subject to certain IRS restrictions and limitations. We anticipate that our discretionary contributions in 2021, if any, will be minimal.
At December 31, 2020, we expect to pay the benefits from other postretirement plans as follows: 2021 — $ 6 million; 2022 — $ 6 million; 2023 — $ 5 million; 2024 — $ 5 million; 2025 — $ 5 million; and $ 23 million in the aggregate from 2026 through 2030.
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To determine the APBO, we assumed discount rates of 4.0 % at December 31, 2020, and 4.5 % at December 31, 2019.
To determine net postretirement benefit cost, we assumed the following weighted-average rates.
Year ended December 31, 2020 2019 2018
Discount rate 4.50 % 4.50 % 3.50 %
Expected return on plan assets 4.50 4.50 4.50
The realized net investment income for the postretirement healthcare plan VEBA trust is subject to federal income taxes, which are reflected in the weighted-average expected return on plan assets shown above.
Assumed healthcare cost trend rates do not have a material impact on net postretirement benefit cost or obligations since the postretirement plan has cost-sharing provisions and benefit limitations.
We do no t expect to recognize a credit or an expense in net postretirement benefit cost for 2021. We recognized a credit of less than $1 million in 2020 and 2019.
We estimate the expected returns on plan assets for the VEBA trust much the same way we estimate returns on our pension funds. The primary investment objectives of the VEBA trust are to obtain a market rate of return, take into consideration the safety and/or risk of the investment, and to diversify the portfolio in order to satisfy the trust’s anticipated liquidity requirements. The following table shows the asset target allocations prescribed by the trust’s investment policy.
Target Allocation
Asset Class 2020
Equity securities 80 %
Fixed income securities 20
Cash equivalents —
Total 100 %
Investments consist of mutual funds and collective investment funds that invest in underlying assets in accordance with the target asset allocations shown above. Exchange-traded mutual funds are valued using quoted prices and, therefore, are classified as Level 1. Investments in collective investment funds are valued using the Net Asset Value practical expedient and are not classified within the fair value hierarchy.
The following tables show the fair values of our postretirement plan assets by asset class at December 31, 2020, and December 31, 2019.
December 31, 2020
in millions Level 1 Level 2 Level 3 Total
ASSET CLASS
Mutual funds:
Equity — U.S. $ 21 — — $ 21
Equity — International 9 — — 9
Fixed income — U.S. 7 — — 7
Collective investment funds:
Equity — U.S. (a)
— — — 14
Other assets (measured at NAV) (a)
— — — 1
Total net assets at fair value $ 37 — — $ 52
(a) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets presented elsewhere within this footnote.
December 31, 2019
in millions Level 1 Level 2 Level 3 Total
ASSET CLASS
Mutual funds:
Equity — U.S. $ 22 — — $ 22
Equity — International 9 — — 9
Fixed income — U.S. 7 — — 7
Fixed income — International — — — —
Collective investment funds:
Equity — U.S. (a)
— $ — — 12
Other assets (measured at NAV) — — — 2
Total net assets at fair value $ 38 $ — — $ 52
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(a) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets presented elsewhere within this footnote.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 introduced a prescription drug benefit under Medicare and prescribes a federal subsidy to sponsors of retiree healthcare benefit plans that offer prescription drug coverage that is “actuarially equivalent” to the benefits under Medicare Part D. Based on our application of the relevant regulatory formula, we determined that the prescription drug coverage related to our retiree healthcare benefit plan is not actuarially equivalent to the Medicare benefit for the vast majority of retirees. For the years ended December 31, 2020, and December 31, 2019, we did not receive federal subsidies.
Employee 401(k) Savings Plan
A substantial number of our employees are covered under a savings plan that is qualified under Section 401(k) of the Internal Revenue Code. The plan permits employees to contribute from 1 % to 100 % of eligible compensation, with up to 6 % being eligible for matching contributions. The plan also permits us to provide a discretionary annual profit sharing contribution to eligible employees who have at least one year of service. We accrued a 1 % contribution for 2020 and made contributions of 1 % and 2 % for 2019 and 2018, respectively, on eligible compensation for employees eligible on the last business day of the respective plan years. We also maintain a deferred savings plan that provides certain employees with benefits they otherwise would not have been eligible to receive under the qualified plan once their compensation for the plan year reached the IRS contribution limits. Total expense associated with the above plans was $ 103 million in 2020, $ 98 million in 2019, and $ 106 million in 2018.
19. Short-Term Borrowings
Selected financial information pertaining to the components of our short-term borrowings is as follows:
December 31,
dollars in millions 2020 2019 2018
FEDERAL FUNDS PURCHASED
Balance at year end $ — 200 $ —
Average during the year 455 $ 61 537
Maximum month-end balance 2,285 1,000 3,197
Weighted-average rate during the year (a)
1.24 % 2.12 % 1.68 %
Weighted-average rate at December 31 (a)
— 1.56 —
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Balance at year end $ 220 $ 187 $ 319
Average during the year 215 203 391
Maximum month-end balance 267 283 614
Weighted-average rate during the year (a)
.11 % .22 % .09 %
Weighted-average rate at December 31 (a)
.04 .09 .09
OTHER SHORT-TERM BORROWINGS
Balance at year end $ 759 $ 705 $ 544
Average during the year 1,452 730 915
Maximum month-end balance 4,606 847 1,133
Weighted-average rate during the year (a)
0.85 % 2.31 % 2.34 %
Weighted-average rate at December 31 (a)
.60 1.99 2.92
(a) Rates exclude the effects of interest rate swaps and caps, which modify the repricing characteristics of certain short-term borrowings. For more information about such financial instruments, see Note 8 (“Derivatives and Hedging Activities”).
As described below and in Note 20 (“Long-Term Debt”), KeyCorp and KeyBank have a number of programs and facilities that support our short-term financing needs. Certain subsidiaries maintain credit facilities with third parties, which provide alternative sources of funding. KeyCorp is the guarantor of some of the third-party facilities.
Short-term credit facilities. We maintain cash on deposit in our Federal Reserve account, which has reduced our need to obtain funds through various short-term unsecured money market products. This account, which was maintained at $ 15.4 billion at December 31, 2020, and the unpledged securities in our investment portfolio provide a buffer to address unexpected short-term liquidity needs. We also have secured borrowing facilities at the FHLB and the Federal Reserve Bank of Cleveland to satisfy short-term liquidity requirements. As of December 31, 2020, our unused secured borrowing capacity was $ 22.6 billion at the Federal Reserve Bank of Cleveland and $ 8.4 billion at the FHLB.
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20. Long-Term Debt
The following table presents the components of our long-term debt, net of unamortized discounts and adjustments related to hedging with derivative financial instruments. We use interest rate swaps and caps, which modify the repricing characteristics of certain long-term debt, to manage interest rate risk. For more information about such financial instruments, see Note 8 (“Derivatives and Hedging Activities”).
December 31,
dollars in millions 2020 2019
Senior medium-term notes due through 2021 (a)
$ 3,962 $ 4,111
3.136 % Subordinated notes due 2028 (b)
162 162
6.875 % Subordinated notes due 2029 (b)
115 109
7.75 % Subordinated notes due 2029 (b)
149 141
7.25 % Subordinated notes due 2021 (c)
311 324
Other subordinated notes (b)(d)
74 71
Total parent company 4,773 4,918
Senior medium-term notes due through 2039 (e)
6,718 5,874
3.18 % Senior remarketable notes due 2027 (f)
232 222
3.40 % Subordinated notes due 2026 (g)
625 589
6.95 % Subordinated notes due 2028 (g)
299 299
3.90 % Subordinated notes due 2029 (g)
398 371
Secured borrowing due through 2025 (h)
19 15
Federal Home Loan Bank advances due through 2038 (i)
608 121
Investment Fund Financing due through 2052 (j)
21 26
Key Govt Finance, Inc. Other Long Term Debt-ASR 4 —
Obligations under Capital Leases due through 2032 (k)
12 13
Total subsidiaries 8,936 7,530
Total long-term debt $ 13,709 $ 12,448
(a) Senior medium-term notes had a weighted-average interest rate of 3.7025 % at December 31, 2020, and 3.7815 % at December 31, 2019. These notes had fixed interest rates at December 31, 2020, and December 31, 2019. These notes may not be redeemed prior to their maturity dates.
(b) See Note 21 (“Trust Preferred Securities Issued by Unconsolidated Subsidiaries”) for a description of these notes.
(c) The First Niagara subordinated debt had a weighted-average interest rate of 7.25 % at December 31, 2020, and a weighted-average interest rate of 7.25 % at December 31, 2019. These notes may not be redeemed prior to their maturity dates.
(d) The First Niagara variable rate trust preferred securities had a weighted-average interest rate of 1.72 % at December 31, 2020, and 3.42 % at December 31, 2019. These notes may be redeemed prior to their maturity dates.
(e) Senior medium-term notes had weighted-average interest rates of 2.516 % at December 31, 2020, and 2.595 % at December 31, 2019. These notes are a combination of fixed and floating rates. These notes may not be redeemed prior to their maturity dates.
(f) The remarketable senior medium-term notes had a weighted-average interest rate of 3.18 % at December 31, 2020, and 3.18 % at December 31, 2019. These notes had fixed interest rates at December 31, 2017, and December 31, 2018. These notes may not be redeemed prior to their maturity dates.
(g) These notes are all obligations of KeyBank and may not be redeemed prior to their maturity dates.
(h) The secured borrowing had weighted-average interest rates of 4.445 % at December 31, 2020, and 4.445 % at December 31, 2019. This borrowing is collateralized by commercial lease financing receivables, and principal reductions are based on the cash payments received from the related receivables. Additional information pertaining to these commercial lease financing receivables is included in Note 4 (“Loan Portfolio”).
(i) Long-term advances from the Federal Home Loan Bank had a weighted-average interest rate of 1.15 % at December 31, 2020, and 3.506 % at December 31, 2019. These advances, which had fixed interest rates, were secured by real estate loans and securities totaling $ 607 million at December 31, 2020, and $ 121 million at December 31, 2019.
(j) Investment Fund Financing had a weighted-average interest rate of 1.77 % at December 31, 2020, and 1.63 % at December 31, 2019.
(k) These are capital leases acquired in the First Niagara merger with a maturity range from March 2021 through October 2032
At December 31, 2020, scheduled principal payments on long-term debt were as follows:
in millions Parent Subsidiaries Total
2021 $ 1,315 $ 1,272 $ 2,587
2022 — 2,403 2,403
2023 — 1,231 1,231
2024 — 1,101 1,101
2025 562 772 1,334
All subsequent years 2,896 2,157 5,053

As described below, KeyBank and KeyCorp have a number of programs that support our long-term financing needs.

Global bank note program. On September 28, 2018, KeyBank updated its Bank Note Program authorizing the issuance of up to $ 20 billion of notes. Under the program, KeyBank is authorized to issue notes with original maturities of seven days or more for senior notes or five years or more for subordinated notes. Notes will be denominated in U.S. dollars. Amounts outstanding under the program and any prior bank note programs are classified as “long-term debt” on the balance sheet.
In 2019, KeyBank issued the following notes under the 2018 Bank Note Program: on February 1, 2019, $ 600 million of 3.300 % Senior Bank Notes due February 1, 2022, and $ 400 million of Floating Rate Senior Bank Notes due February 1, 2022; and on March 13, 2019, $ 350 million of 3.900 % Subordinated Bank Notes due April 13, 2029.
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In 2020, KeyBank issued the following notes under the 2018 Bank Note Program: on March 10, 2020, $ 700 million of 1.25 % Senior Bank Notes due March 10, 2023; and on December 16, 2020, $ 750 million Fixed-to-Floating Rate Senior Bank Notes due January 3, 2024 and $ 350 million Floating Rate Senior Bank Notes due January 3, 2024.
As of December 31, 2020, $ 3.2 billion of notes had been issued under the 2018 Bank Note Program, and $ 16.8 billion remained available for issuance.
KeyCorp shelf registration, including Medium-Term Note Program . On June 9, 2020 KeyCorp updated its shelf registration statement on file with the SEC under rules that allow companies to register various types of debt and equity securities without limitations on the aggregate amounts available for issuance. KeyCorp also maintains a Medium-Term Note Program that permits KeyCorp to issue notes with original maturities of nine months or more.
In 2019, KeyCorp issued the following notes under the program: On September 11, 2019, $ 750 million of 2.550 % Senior Notes due October 1, 2029.
On February 6, 2020, KeyCorp issued $ 800 million of 2.25 % Senior Notes due April 6, 2027, under the Medium-Term Note Program.
At December 31, 2020, KeyCorp had authorized and available for issuance up to $ 5.0 billion of additional debt securities under the Medium-Term Note Program.
Issuances of capital securities or preferred stock by KeyCorp must be approved by the Board and cannot be objected to by the Federal Reserve.
21. Trust Preferred Securities Issued by Unconsolidated Subsidiaries
We own the outstanding common stock of business trusts formed by us that issued corporation-obligated mandatorily redeemable trust preferred securities. The trusts used the proceeds from the issuance of their trust preferred securities and common stock to buy debentures issued by KeyCorp. These debentures are the trusts’ only assets; the interest payments from the debentures finance the distributions paid on the mandatorily redeemable trust preferred securities. The outstanding common stock of these business trusts is recorded in “other investments” on our balance sheet.
We unconditionally guarantee the following payments or distributions on behalf of the trusts:
• required distributions on the trust preferred securities;
• the redemption price when a capital security is redeemed; and
• the amounts due if a trust is liquidated or terminated.
The Regulatory Capital Rules require us to treat our mandatorily redeemable trust preferred securities as Tier 2 capital.
The trust preferred securities, common stock, and related debentures are summarized as follows:
dollars in millions
Trust Preferred
Securities,
Net of Discount (a)
Common
Stock
Principal
Amount of
Debentures,
Net of Discount (b)
Interest Rate
of Trust Preferred
Securities and
Debentures (c)
Maturity
of Trust Preferred
Securities and
Debentures
December 31, 2020
KeyCorp Capital I $ 156 $ 6 $ 162 0.965 % 2028
KeyCorp Capital II 110 4 114 6.875 2029
KeyCorp Capital III 145 4 149 7.750 2029
HNC Statutory Trust III 20 1 21 1.605 2035
Willow Grove Statutory Trust I 19 1 20 1.527 2036
HNC Statutory Trust IV 17 1 18 1.494 2037
Westbank Capital Trust II 8 — 8 2.429 2034
Westbank Capital Trust III 8 — 8 2.429 2034
Total $ 483 $ 17 $ 500 4.464 % —
December 31, 2019 $ 466 $ 17 $ 483 5.214 % —
(a) The trust preferred securities must be redeemed when the related debentures mature, or earlier if provided in the governing indenture. Each issue of trust preferred securities carries an interest rate identical to that of the related debenture. Certain trust preferred securities include debt issuance costs and basis adjustments related to fair value hedges totaling $ 70 million at December 31, 2020, and $ 57 million at December 31, 2019. See Note 8 (“Derivatives and Hedging Activities”) for an explanation of fair value hedges.
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(b) We have the right to redeem these debentures. If the debentures purchased by KeyCorp Capital I, HNC Statutory Trust III, Willow Grove Statutory Trust I, HNC Statutory Trust IV, Westbank Capital Trust II, or Westbank Capital Trust III are redeemed before they mature, the redemption price will be the principal amount, plus any accrued but unpaid interest. If the debentures purchased by KeyCorp Capital II or KeyCorp Capital III are redeemed before they mature, the redemption price will be the greater of: (i) the principal amount, plus any accrued but unpaid interest, or (ii) the sum of the present values of principal and interest payments discounted at the Treasury Rate (as defined in the applicable indenture), plus 20 basis points for KeyCorp Capital II or 25 basis points for KeyCorp Capital III or 50 basis points in the case of redemption upon either a tax or a capital treatment event for either KeyCorp Capital II or KeyCorp Capital III, plus any accrued but unpaid interest. The principal amount of certain debentures includes debt issuance costs and basis adjustments related to fair value hedges totaling $ 70 million at December 31, 2020, and $ 57 million at December 31, 2019. See Note 8 for an explanation of fair value hedges. The principal amount of debentures, net of discounts, is included in “long-term debt” on the balance sheet.
(c) The interest rates for the trust preferred securities issued by KeyCorp Capital II and KeyCorp Capital III are fixed. The trust preferred securities issued by KeyCorp Capital I have a floating interest rate, equal to three-month LIBOR plus 74 basis points, that reprices quarterly. The trust preferred securities issued by HNC Statutory Trust III have a floating interest rate, equal to three-month LIBOR plus 140 basis points, that reprices quarterly. The trust preferred securities issued by Willow Grove Statutory Trust I have a floating interest rate, equal to three-month LIBOR plus 131 basis points, that reprices quarterly. The trust preferred securities issued by HNC Statutory Trust IV have a floating interest rate, equal to three-month LIBOR plus 128 basis points, that reprices quarterly. The trust preferred securities issued by Westbank Capital Trust II and Westbank Capital Trust III each have a floating interest rate, equal to three-month LIBOR plus 219 basis points, that reprices quarterly.  The total interest rates are weighted-average rates.
22. Commitments, Contingent Liabilities, and Guarantees
Commitments to Extend Credit or Funding
Loan commitments provide for financing on predetermined terms as long as the client continues to meet specified criteria. These agreements generally carry variable rates of interest and have fixed expiration dates or termination clauses. We typically charge a fee for our loan commitments. Since a commitment may expire without resulting in a loan, our aggregate outstanding commitments may significantly exceed our eventual cash outlay.
Loan commitments involve credit risk not reflected on our balance sheet. We mitigate exposure to credit risk with internal controls that guide how we review and approve applications for credit, establish credit limits and, when necessary, demand collateral. In particular, we evaluate the creditworthiness of each prospective borrower on a case-by-case basis and, when appropriate, adjust the allowance for credit losses on lending-related commitments. Additional information pertaining to this allowance is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Liability for Credit Losses on Lending-Related Commitments,” and in Note 5 (“Asset Quality”).
We also provide financial support to private equity investments, including existing direct portfolio companies and indirect private equity funds, to satisfy unfunded commitments. These unfunded commitments are not recorded on our balance sheet. Additional information on principal investing commitments is provided in Note 6 (“Fair Value Measurements”). Other unfunded equity investment commitments at December 31, 2020, and December 31, 2019, related to tax credit investments and were primarily attributable to LIHTC investments. Unfunded tax credit investment commitments are recorded on our balance sheet in “other liabilities.” Additional information on LIHTC commitments is provided in Note 13 (“Variable Interest Entities”).
The following table shows the remaining contractual amount of each class of commitment related to extending credit or funding principal investments as of December 31, 2020, and December 31, 2019. For loan commitments and commercial letters of credit, this amount represents our maximum possible accounting loss on the unused commitment if the borrower were to draw upon the full amount of the commitment and subsequently default on payment for the total amount of the then outstanding loan.
December 31,
in millions
2020 2019
Loan commitments:
Commercial and other $ 47,792 $ 45,323
Commercial real estate and construction 2,365 2,961
Home equity 9,299 9,945
Credit cards 6,685 6,560
Total loan commitments 66,141 64,789
Commercial letters of credit 74 91
Purchase card commitments 708 729
Principal investing commitments 16 21
Tax credit investment commitments 487 547
Total loan and other commitments $ 67,426 $ 66,177

Legal Proceedings

Litigation. From time to time, in the ordinary course of business, we and our subsidiaries are subject to various litigation, investigations, and administrative proceedings. Private, civil litigations may range from individual actions involving a single plaintiff to putative class action lawsuits with potentially thousands of class members.
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Investigations may involve both formal and informal proceedings, by both government agencies and self-regulatory bodies. These matters may involve claims for substantial monetary relief. At times, these matters may present novel claims or legal theories. Due to the complex nature of these various other matters, it may be years before some matters are resolved. While it is impossible to ascertain the ultimate resolution or range of financial liability, based on information presently known to us, we do not believe there is any matter to which we are a party, or involving any of our properties that, individually or in the aggregate, would reasonably be expected to have a material adverse effect on our financial condition. We continually monitor and reassess the potential materiality of these litigation matters. We note, however, that in light of the inherent uncertainty in legal proceedings there can be no assurance that the ultimate resolution will not exceed established reserves. As a result, the outcome of a particular matter, or a combination of matters, may be material to our results of operations for a particular period, depending upon the size of the loss or our income for that particular period.
Guarantees
We are a guarantor in various agreements with third parties. The following table shows the types of guarantees that we had outstanding at December 31, 2020. Information pertaining to the basis for determining the liabilities recorded in connection with these guarantees is included in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Contingencies and Guarantees.”
December 31, 2020 Maximum Potential Undiscounted Future Payments Liability Recorded
in millions
Financial guarantees:
Standby letters of credit $ 3,231 $ 71
Recourse agreement with FNMA 5,811 23
Residential mortgage reserve 2,471 10
Written put options (a)
3,631 54
Total $ 15,144 $ 158
(a) The maximum potential undiscounted future payments represent notional amounts of derivatives qualifying as guarantees.

We determine the payment/performance risk associated with each type of guarantee described below based on the probability that we could be required to make the maximum potential undiscounted future payments shown in the preceding table. We use a scale of low ( 0 % to 30 % probability of payment), moderate (greater than 30 % to 70 % probability of payment), or high (greater than 70 % probability of payment) to assess the payment/performance risk, and have determined that the payment/performance risk associated with each type of guarantee outstanding at December 31, 2020, is low.

Standby letters of credit. KeyBank issues standby letters of credit to address clients’ financing needs. These instruments obligate us to pay a specified third party when a client fails to repay an outstanding loan or debt instrument or fails to perform some contractual nonfinancial obligation. Any amounts drawn under standby letters of credit are treated as loans to the client; they bear interest (generally at variable rates) and pose the same credit risk to us as a loan. At December 31, 2020, our standby letters of credit had a remaining weighted-average life of 1.7 years, with remaining actual lives ranging from less than 1 year to as many as 13.9 years.

Recourse agreement with FNMA. At December 31, 2020, the outstanding commercial mortgage loans in this program had a weighted-average remaining term of 7.9 years, and the unpaid principal balance outstanding of loans sold by us as a participant was $ 19.3 billion. The maximum potential amount of undiscounted future payments that we could be required to make under this program, as shown in the preceding table, is equal to approximately 30 % of the principal balance of loans outstanding at December 31, 2020. FNMA delegates responsibility for originating, underwriting, and servicing mortgages, and we assume a limited portion of the risk of loss during the remaining term on each commercial mortgage loan that we sell to FNMA. We maintain a reserve for such potential losses in an amount that we believe approximates the fair value of our liability in addition to the expected credit loss for the guarantee as described in Note 5 (“Asset Quality”).
Residential Mortgage Banking. We often originate and sell residential mortgage loans and retain the servicing rights. Our loan sales activity is generally conducted through loan sales in a secondary market sponsored by FNMA and FHLMC and through the issuance of GNMA mortgage backed securities. Subsequent to the sale of mortgage loans, we do not typically retain any interest in the underlying loans except through our relationship as the servicer of the loans.
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As is customary in the mortgage banking industry, we, or banks we have acquired, have made certain representations and warranties related to the sale of residential mortgage loans (including loans sold with servicing rights released) and to the performance of our obligations as servicer. The breach of any such representations or warranties could result in losses for us. Our maximum exposure to loss is equal to the outstanding principal balance of the sold loans; however, any loss would be reduced by any payments received on the loans or through the sale of collateral.
At December 31, 2020, the unpaid principal balance outstanding of loans sold by us was $ 8.2 billion. The maximum potential amount of undiscounted future payments that we could be required to make under this program, as shown in the preceding table, is equal to approximately 30 % of the principal balance of loans outstanding at December 31, 2020.
Our liability for estimated repurchase obligations on loans sold, which is included in other liabilities on our balance sheet, was $ 10 million at December 31, 2020.

Written put options. In the ordinary course of business, we “write” put options for clients that wish to mitigate their exposure to changes in interest rates and commodity prices. At December 31, 2020, our written put options had an average life of three years . These instruments are considered to be guarantees, as we are required to make payments to the counterparty (the client) based on changes in an underlying variable that is related to an asset, a liability, or an equity security that the client holds. We are obligated to pay the client if the applicable benchmark interest rate or commodity price is above or below a specified level (known as the “strike rate”). These written put options are accounted for as derivatives at fair value, as further discussed in Note 8 (“Derivatives and Hedging Activities”). We mitigate our potential future payment obligations by entering into offsetting positions with third parties.
Written put options where the counterparty is a broker-dealer or bank are accounted for as derivatives at fair value but are not considered guarantees since these counterparties typically do not hold the underlying instruments. In addition, we are a purchaser and seller of credit derivatives, which are further discussed in Note 8.

Other Off-Balance Sheet Risk
Other off-balance sheet risk stems from financial instruments that do not meet the definition of a guarantee as specified in the applicable accounting guidance, and from other relationships.
Indemnifications provided in the ordinary course of business. We provide certain indemnifications, primarily through representations and warranties in contracts that we execute in the ordinary course of business in connection with loan and lease sales and other ongoing activities, as well as in connection with purchases and sales of businesses. We maintain reserves, when appropriate, with respect to liability that reasonably could arise as a result of these indemnities.
Intercompany guarantees. KeyCorp, KeyBank, and certain of our affiliates are parties to various guarantees that facilitate the ongoing business activities of other affiliates. These business activities encompass issuing debt, assuming certain lease and insurance obligations, purchasing or issuing investments and securities, and engaging in certain leasing transactions involving clients.
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23. Accumulated Other Comprehensive Income

Our changes in AOCI for the years ended December 31, 2020, and December 31, 2019, are as follows:
in millions
Unrealized gains
(losses) on securities
available for sale
Unrealized gains
(losses) on derivative
financial instruments
Foreign currency
translation
adjustment
Net pension and
postretirement
benefit costs
Total
Balance at December 31, 2018 $ ( 373 ) $ ( 50 ) $ ( 14 ) $ ( 381 ) $ ( 818 )
Other comprehensive income before reclassification, net of income taxes
503 335 3 19 860
Amounts reclassified from accumulated other comprehensive income, net of income taxes (a)
( 15 ) ( 35 ) 11 23 ( 16 )
Net current-period other comprehensive income, net of income taxes 488 300 14 42 844
Balance at December 31, 2019 $ 115 $ 250 $ — $ ( 339 ) $ 26
Other comprehensive income before reclassification, net of income taxes
455 466 — 15 936
Amounts reclassified from accumulated other comprehensive income, net of income taxes (a)
( 3 ) ( 240 ) — 19 ( 224 )
Net current-period other comprehensive income, net of income taxes 452 226 — 34 712
Balance at December 31, 2020 $ 567 $ 476 $ — $ ( 305 ) $ 738
(a) See table below for details about these reclassifications.


Our reclassifications out of AOCI for the years ended December 31, 2020, and December 31, 2019, are as follows:
Twelve months ended December 31,
Affected Line Item in the Statement
Where Net Income is Presented
in millions 2020 2019
Unrealized gains (losses) on available for sale securities
Realized gains $ 4 20 Other income
4 20
Income (loss) from continuing operations before income taxes
1 5 Income taxes
$ 3 15 Income (loss) from continuing operations
Unrealized gains (losses) on derivative financial instruments
Interest rate $ 319 $ 15 Interest income — Loans
Interest rate ( 4 ) ( 1 ) Interest expense — Long-term debt
Foreign exchange contracts — 32 Other income
315 46
Income (loss) from continuing operations before income taxes
75 11 Income taxes
$ 240 $ 35 Income (loss) from continuing operations
Foreign currency translation adjustment — ( 14 ) Other income
— ( 14 )
Income (loss) from continuing operations before income taxes
— ( 3 ) Income taxes
— ( 11 ) Income (loss) from continuing operations
Net pension and postretirement benefit costs
Amortization of losses $ ( 17 ) $ ( 13 ) Other expense
Settlement loss ( 9 ) ( 18 ) Other expense
Amortization of prior service credit 1 — Other expense
( 25 ) ( 31 )
Income (loss) from continuing operations before income taxes
( 6 ) ( 8 ) Income taxes
$ ( 19 ) $ ( 23 ) Income (loss) from continuing operations
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24. Shareholders' Equity
Comprehensive Capital Plan

In January 2021, the Board of Directors authorized the repurchase of up to $ 900 million of our Common Shares, effective through the third quarter of 2021. Under our previous authorization pursuant to our 2019 capital plan, we completed $ 152 million of Common Share repurchases in the first quarter of 2020, including $ 117 million of Common Share repurchases in the open market and $ 35 million of Common Share repurchases related to employee equity compensation programs. These repurchases were completed prior to our announcement to temporarily suspend share repurchase activity on March 17, 2020, in response to the COVID-19 pandemic. We repurchased a total of $ 489 million of common shares pursuant to the 2019 capital plan, dating back to the third quarter of 2019.

Consistent with our capital plan, the Board declared a quarterly dividend of $ .185 per Common Share for each quarter of 2020. These quarterly dividend payments brought our annual dividend to $ .74 per Common Share for 2020.
Preferred Stock

The following table summarizes our preferred stock at December 31, 2020:
Preferred stock series Amount outstanding (in millions) Shares authorized and outstanding Par value Liquidation preference Ownership interest per depositary share Liquidation preference per depositary share 2020 dividends paid per depositary share
Fixed-to-Floating Rate Perpetual Noncumulative Series D $ 525 21,000 $ 1 $ 25,000 1/25th $ 1,000 $ 12.50
Fixed-to-Floating Rate Perpetual Noncumulative Series E 500 500,000 1 1,000 1/40th 25 .382813
Fixed Rate Perpetual Noncumulative Series F 425 425,000 1 1,000 1/40th 25 .353125
Fixed Rate Perpetual Noncumulative Series G 450 450,000 1 1,000 1/40th 25 .351563

Capital Adequacy
KeyCorp and KeyBank (consolidated) must meet specific capital requirements imposed by federal banking regulators. Sanctions for failure to meet applicable capital requirements may include regulatory enforcement actions that restrict dividend payments, require the adoption of remedial measures to increase capital, terminate FDIC deposit insurance, and mandate the appointment of a conservator or receiver in severe cases. In addition, failure to maintain a “well capitalized” status affects how regulators evaluate applications for certain endeavors, including acquisitions, continuation and expansion of existing activities, and commencement of new activities, and could make clients and potential investors less confident. As of December 31, 2020, KeyCorp and KeyBank (consolidated) met all regulatory capital requirements.
KeyBank (consolidated) qualified for the “well capitalized” prompt corrective action capital category at December 31, 2020, because its capital and leverage ratios exceeded the prescribed threshold ratios for that capital category and it was not subject to any written agreement, order, or directive to meet and maintain a specific capital level for any capital measure. Since that date, we believe there has been no change in condition or event that has occurred that would cause the capital category for KeyBank (consolidated) to change.
BHCs are not assigned to any of the five prompt corrective action capital categories applicable to insured depository institutions. If, however, those categories applied to BHCs, we believe that KeyCorp would satisfy the criteria for a “well capitalized” institution at December 31, 2020, and since that date, we believe there has been no change in condition or event that has occurred that would cause such capital category to change.
Because the regulatory capital categories under the prompt corrective action regulations serve a limited supervisory function, investors should not use them as a representation of the overall financial condition or prospects of KeyBank or KeyCorp.
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At December 31, 2020, Key and KeyBank (consolidated) had regulatory capital in excess of all current minimum risk-based capital (including all adjustments for market risk) and leverage ratio requirements as shown in the following table.
Actual To Meet Minimum
Capital Adequacy
Requirements 		To Qualify as Well
Capitalized Under Federal
Deposit Insurance Act
dollars in millions Amount Ratio Amount Ratio Amount Ratio
December 31, 2020
TOTAL CAPITAL TO NET RISK-WEIGHTED ASSETS
Key $ 17,976 13.40 % $ 10,736 8.00 % N/A N/A
KeyBank (consolidated) 17,195 13.09 10,511 8.00 $ 13,139 10.00 %
TIER 1 CAPITAL TO NET RISK-WEIGHTED ASSETS
Key $ 14,907 11.11 % $ 8,052 6.00 % N/A N/A
KeyBank (consolidated) 14,539 11.07 7,884 6.00 $ 10,511 8.00 %
TIER 1 CAPITAL TO AVERAGE QUARTERLY TANGIBLE ASSETS
Key $ 14,907 8.94 % $ 6,671 4.00 % N/A N/A
KeyBank (consolidated) 14,539 8.80 6,605 4.00 $ 8,256 5.00 %
December 31, 2019
TOTAL CAPITAL TO NET RISK-WEIGHTED ASSETS
Key $ 16,731 12.79 % $ 10,469 8.00 % N/A N/A
KeyBank (consolidated) 16,313 12.69 10,287 8.00 $ 12,858 10.00 %
TIER 1 CAPITAL TO NET RISK-WEIGHTED ASSETS
Key $ 14,207 10.86 % $ 7,852 6.00 % N/A N/A
KeyBank (consolidated) 14,091 10.96 7,715 6.00 $ 7,715 6.00 %
TIER 1 CAPITAL TO AVERAGE QUARTERLY TANGIBLE ASSETS
Key $ 14,207 9.87 % $ 5,756 4.00 % N/A N/A
KeyBank (consolidated) 14,091 9.91 5,688 4.00 $ 7,110 5.00 %

25. Business Segment Reporting

Key previously reported its results of operations through two reportable business segments, Key Community Bank and Key Corporate Bank. In the first quarter of 2019, Key underwent a company-wide organizational change, resulting in the realignment of its businesses into two reportable business segments, Consumer Bank and Commercial Bank, with the remaining operations that do not meet the criteria for disclosure as a separate reportable business recorded in Other. The new business segment structure aligns with how management reviews performance and makes decisions by client, segment and business unit. Prior period information was restated to conform to the new business segment structure. Additionally, goodwill was reallocated to the new segments on a relative fair value basis. On March 31, 2019, the Consumer Bank was allocated goodwill in the amount of $ 1.6 billion and the Commercial Bank was allocated goodwill in the amount of $ 912 million.

The following is a description of the segments and their primary businesses at December 31, 2020.

Consumer Bank

The Consumer Bank serves individuals and small businesses throughout our 15 -state branch footprint by offering a variety of deposit and investment products, personal finance and financial wellness services, lending, mortgage and home equity, student loan refinancing, credit card, treasury services, and business advisory services. In addition, wealth management and investment services are offered to assist institutional, non-profit, and high-net-worth clients with their banking, trust, portfolio management, charitable giving, and related needs.

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Commercial Bank

The Commercial Bank is an aggregation of our Institutional and Commercial operating segments. The Commercial operating segment is a full-service corporate bank focused principally on serving the needs of middle market clients in seven industry sectors: consumer, energy, healthcare, industrial, public sector, real estate, and technology. The Commercial operating segment is also a significant servicer of commercial mortgage loans and a significant special servicer of CMBS. The Institutional operating segment delivers a broad suite of banking and capital markets products to its clients, including syndicated finance, debt and equity capital markets, commercial payments, equipment finance, commercial mortgage banking, derivatives, foreign exchange, financial advisory, and public finance.

Other

Other includes various corporate treasury activities such as management of our investment securities portfolio, long-term debt, short-term liquidity and funding activities, and balance sheet risk management, our principal investing unit, and various exit portfolios as well as reconciling items, which primarily represent the unallocated portion of nonearning assets of corporate support functions. Charges related to the funding of these assets are part of net interest income and are allocated to the business segments through noninterest expense. Reconciling items also include intercompany eliminations and certain items that are not allocated to the business segments because they do not reflect their normal operations.

The table on the following page shows selected financial data for our major business segments for the years ended December 31, 2020, 2019, and 2018.

The information was derived from the internal financial reporting system that we use to monitor and manage our financial performance. GAAP guides financial accounting, but there is no authoritative guidance for “management accounting” — the way we use our judgment and experience to make reporting decisions. Consequently, the line of business results we report may not be comparable to line of business results presented by other companies.

The selected financial data is based on internal accounting policies designed to compile results on a consistent basis and in a manner that reflects the underlying economics of the businesses. In accordance with our policies:
• Net interest income is determined by assigning a standard cost for funds used or a standard credit for funds provided based on their assumed maturity, prepayment, and/or repricing characteristics.
• Indirect expenses, such as computer servicing costs and corporate overhead, are allocated based on assumptions regarding the extent that each line of business actually uses the services.
• The consolidated provision for credit losses is allocated among the lines of business primarily based on their actual net loan charge-offs, adjusted periodically for loan growth and changes in risk profile. The amount of the consolidated provision is based on the methodology that we use to estimate our consolidated ALLL. This methodology is described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan and Lease Losses.”
• Capital is assigned to each line of business based on economic equity.
Developing and applying the methodologies that we use to allocate items among our lines of business is a dynamic process. Accordingly, financial results may be revised periodically to reflect enhanced alignment of expense base allocation drivers, changes in the risk profile of a particular business, or changes in our organizational structure.
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Year ended December 31,
Consumer Bank Commercial Bank
dollars in millions
2020 2019 2018 2020 2019 2018
SUMMARY OF OPERATIONS
Net interest income (TE)
$ 2,434 $ 2,366 $ 2,306 $ 1,698 $ 1,621 $ 1,657
Noninterest income
1,003 922 915 1,507 1,390 1,328
Total revenue (TE) (a)
3,437 3,288 3,221 3,205 3,011 2,985
Provision for credit losses
288 188 147 738 118 102
Depreciation and amortization expense
77 97 103 144 135 139
Other noninterest expense
2,200 2,078 2,143 1,589 1,408 1,430
Income (loss) from continuing operations before income taxes (TE)
872 925 828 734 1,350 1,314
Allocated income taxes (benefit) and TE adjustments
207 219 196 101 219 207
Income (loss) from continuing operations
665 706 632 633 1,131 1,107
Income (loss) from discontinued operations, net of taxes
— — — — — —
Net income (loss)
665 706 632 633 1,131 1,107
Less: Net income (loss) attributable to noncontrolling interests
— — — — — —
Net income (loss) attributable to Key
$ 665 $ 706 $ 632 $ 633 $ 1,131 $ 1,107
AVERAGE BALANCES (b)
Loans and leases
$ 38,906 $ 32,536 $ 31,307 $ 63,108 $ 57,988 $ 55,828
Total assets (a)
42,953 36,096 34,523 72,056 66,122 63,684
Deposits
79,811 72,544 68,821 46,862 36,212 33,675
OTHER FINANCIAL DATA
Expenditures for additions to long-lived assets (a), (b)
$ 40 $ 150 $ ( 38 ) $ 1 $ ( 8 ) $ ( 17 )
Net loan charge-offs (b)
134 157 149 309 128 85
Return on average allocated equity (b)
18.92 % 21.30 % 19.24 % 12.86 % 24.99 % 24.94 %
Return on average allocated equity
18.92 21.30 19.24 12.86 24.99 24.94
Average full-time equivalent employees (c)
8,213 9,292 9,957 2,093 2,232 2,449
Year ended December 31, Other Key
dollars in millions 2020 2019 2018 2020 2019 2018
SUMMARY OF OPERATIONS
Net interest income (TE) $ ( 69 ) $ ( 46 ) $ ( 23 ) $ 4,063 $ 3,941 $ 3,940
Noninterest income 142 147 272 2,652 2,459 2,515
Total revenue (TE) (a)
73 101 249 6,715 6,400 6,455
Provision for credit losses ( 5 ) 139 ( 3 ) 1,021 445 246
Depreciation and amortization expense 140 142 158 361 374 400
Other noninterest expense ( 41 ) 61 2 3,748 3,527 3,575
Income (loss) from continuing operations before income taxes (TE) ( 21 ) ( 241 ) 92 1,585 2,054 2,234
Allocated income taxes (benefit) and TE adjustments ( 52 ) ( 96 ) ( 28 ) 256 346 375
Income (loss) from continuing operations 31 ( 145 ) 120 1,329 1,708 1,859
Income (loss) from discontinued operations, net of taxes 14 9 7 14 9 7
Net income (loss) 45 ( 136 ) 127 1,343 1,717 1,866
Less: Net income (loss) attributable to noncontrolling interests — — — — — —
Net income (loss) attributable to Key $ 45 $ ( 136 )
(d)
$ 127 $ 1,343 $ 1,717 $ 1,866
AVERAGE BALANCES (b)
Loans and leases $ 675 $ 987 $ 1,203 $ 102,689 $ 91,511 $ 88,338
Total assets (a)
47,046 40,961 38,605 162,055 143,179 136,812
Deposits 613 1,274 2,555 127,286 110,030 105,051
OTHER FINANCIAL DATA
Expenditures for additions to long-lived assets (a), (b)
$ 120 $ 103 $ 103 $ 161 $ 245 $ 48
Net loan charge-offs (b)
— 139 — 443 424 234
Return on average allocated equity (b)
.34 % ( 1.66 ) % 1.62 % 7.54 % 10.27 % 12.29 %
Return on average allocated equity .49 ( 1.56 ) 1.71 7.62 10.32 12.33
Average full-time equivalent employees (c)
6,520 5,521 5,774 16,826 17,045 18,180
(a) Substantially all revenue generated by our major business segments is derived from clients that reside in the United States. Substantially all long-lived assets, including premises and equipment, capitalized software, and goodwill held by our major business segments, are located in the United States.
(b) From continuing operations.
(c) The number of average full-time equivalent employees was not adjusted for discontinued operations.
(d) Other segments included $ 106 million provision for credit loss, net of tax, related to a previously disclosed fraud incident.
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26. Condensed Financial Information of the Parent Company
CONDENSED BALANCE SHEETS
December 31,
in millions
2020 2019
ASSETS
Cash and due from banks $ 3,799 $ 3,813
Short-term investments 21 20
Securities available for sale 12 10
Other investments 43 36
Loans to:
Banks 50 50
Nonbank subsidiaries 16 16
Total loans 66 66
Investment in subsidiaries:
Banks 17,645 16,969
Nonbank subsidiaries 900 823
Total investment in subsidiaries 18,545 17,792
Goodwill 167 167
Corporate-owned life insurance 207 205
Derivative assets 100 44
Accrued income and other assets 299 295
Total assets $ 23,259 $ 22,448
LIABILITIES
Accrued expense and other liabilities $ 505 $ 492
Long-term debt due to:
Subsidiaries 500 483
Unaffiliated companies 4,273 4,435
Total long-term debt 4,773 4,918
Total liabilities 5,278 5,410
SHAREHOLDERS’ EQUITY (a)
17,981 17,038
Total liabilities and shareholders’ equity $ 23,259 $ 22,448
(a) See Key’s Consolidated Statements of Changes in Equity.

CONDENSED STATEMENTS OF INCOME
Year ended December 31,
in millions 2020 2019 2018
INCOME
Dividends from subsidiaries:
Bank subsidiaries $ 1,250 $ 1,204 $ 1,675
Nonbank subsidiaries — 70 —
Interest income from subsidiaries 4 9 11
Other income 8 11 11
Total income 1,262 1,294 1,697
EXPENSE
Interest on long-term debt with subsidiary trusts 18 22 20
Interest on other borrowed funds 114 151 137
Personnel and other expense 63 87 69
Total expense 195 260 226
Income (loss) before income taxes and equity in net income (loss) less dividends from subsidiaries 1,067 1,034 1,471
Income tax (expense) benefit 38 57 55
Income (loss) before equity in net income (loss) less dividends from subsidiaries 1,105 1,091 1,526
Equity in net income (loss) less dividends from subsidiaries 238 626 340
NET INCOME (LOSS) 1,343 1,717 1,866
Less: Net income attributable to noncontrolling interests — — —
NET INCOME (LOSS) ATTRIBUTABLE TO KEY $ 1,343 $ 1,717 $ 1,866
.

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CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31,
in millions 2020 2019 2018
OPERATING ACTIVITIES
Net income (loss) attributable to Key $ 1,343 $ 1,717 $ 1,866
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Deferred income taxes (benefit) 2 ( 43 ) 109
Stock-based compensation expense 11 8 8
Equity in net (income) loss less dividends from subsidiaries ( 238 ) ( 626 ) ( 340 )
Net (increase) decrease in other assets ( 66 ) 39 ( 58 )
Net increase (decrease) in other liabilities 12 11 8
Other operating activities, net 131 244 79
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,195 1,350 1,672
INVESTING ACTIVITIES
Net (increase) decrease in securities available for sale and in short-term and other investments ( 7 ) ( 6 ) 1
Cash infusion from purchase of Cain Brothers — — —
Proceeds from sales, prepayments and maturities of securities available for sale — — —
Net (increase) decrease in loans to subsidiaries — 15 200
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ( 7 ) 9 201
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt 800 750 1,250
Payments on long-term debt ( 1,003 ) ( 300 ) ( 750 )
Repurchase of Treasury Shares ( 170 ) ( 868 ) ( 1,145 )
Net cash from the issuance (redemption) of Common Shares and preferred stock — 435 412
Cash dividends paid ( 829 ) ( 804 ) ( 656 )
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ( 1,202 ) ( 787 ) ( 889 )
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS ( 14 ) 572 984
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 3,813 3,241 2,257
CASH AND DUE FROM BANKS AT END OF YEAR $ 3,799 $ 3,813 $ 3,241
KeyCorp paid interest on borrowed funds totaling $ 204 million in 2020, $ 151 million in 2019, and $ 131 million in 2018.
27. Revenue from Contracts with Customers

The following table represents a disaggregation of revenue from contracts with customers, by line of business, for the twelve months ended December 31, 2020, and December 31, 2019:
Year ended December 31, 2020 2019
dollars in millions Consumer Bank Commercial Bank Total Contract Revenue Consumer Bank Commercial Bank Total Contract Revenue
NONINTEREST INCOME
Trust and investment services income $ 374 $ 67 $ 441 $ 355 $ 64 $ 419
Investment banking and debt placement fees — 305 305 — 263 263
Services charges on deposit accounts 189 122 311 228 109 337
Cards and payments income 160 201 361 164 106 270
Other noninterest income 10 — 10 13 — 13
Total revenue from contracts with customers $ 733 $ 695 $ 1,428 $ 760 $ 542 $ 1,302
Other noninterest income (a)
1,082 1,010
Noninterest income from other segments (b)
142 147
Total noninterest income $ 2,652 $ 2,459
(a) Noninterest income considered earned outside the scope of contracts with customers.
(b) Other includes other segments that consists of corporate treasury, our principal investing unit, and various exit portfolios as well as reconciling items which primarily represents the unallocated portion of nonearning assets of corporate support functions. Charges related to the funding of these assets are part of net interest income and are allocated to the business segments through noninterest expense. Reconciling items also includes intercompany eliminations and certain items that are not allocated to the business segments because they do not reflect their normal operations. Refer to Note 25 (“Business Segment Reporting”) for more information.

We had no material contract assets or contract liabilities for the twelve months ended December 31, 2020, and December 31, 2019.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, KeyCorp carried out an evaluation, under the supervision and with the participation of KeyCorp’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of KeyCorp’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), to ensure that information required to be disclosed by KeyCorp in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to KeyCorp’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. Based upon that evaluation, KeyCorp’s Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective, in all material respects, as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting

There were no changes in KeyCorp's internal control over financial reporting during the fourth quarter of 2020 that have materially affected, or are reasonably likely to materially affect, KeyCorp's internal control over financial reporting. We implemented internal controls to ensure we adequately calculated changes due to, and properly assessed the impact of, the accounting standards updates related to our allowance for credit losses on our financial statements to facilitate its adoption on January 1, 2020. There were no significant changes to our internal control over financial reporting due to the adoption of the new standard.
Reports Regarding Internal Controls
Management’s Annual Report on Internal Control over Financial Reporting, the Report of Ernst & Young LLP, Independent Registered Public Accounting Firm on Internal Control over Financial Reporting, and the Report of Ernst & Young LLP, Independent Registered Public Accounting Firm are included in Item 8 on pages 99, 100, and 101, respectively.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The names of our executive officers, and biographical information for each, is set forth in Item 1. Business of this report.

The other information required by this item will be set forth in the following sections of KeyCorp’s Definitive Proxy Statement for the 2021 Annual Meeting of Shareholders to be held May 13, 2021 (the “2021 Proxy Statement”), and these sections are incorporated herein by reference:

• “Proposal One: Election of Directors”
• “Corporate Governance Documents — Code of Business Conduct and Ethics”
• “The Board of Directors and Its Committees — Board and Committee Responsibilities — Audit Committee”
• “Additional Information — Other Proposals and Director Nominations for the 2021 Annual Meeting of Shareholders”

KeyCorp expects to file the 2021 Proxy Statement with the SEC on or about March 21, 2021.

183

Any amendment to, or waiver from a provision of, the Code of Business Conduct and Ethics that applies to KeyCorp’s Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer, or any other executive officer or director, will be promptly disclosed on KeyCorp’s website (www.key.com/ir) as required by laws, rules and regulations of the SEC.
ITEM 11. EXECUTIVE COMPENSATION

The information required by this item will be set forth in the following sections of the 2021 Proxy Statement and these sections are incorporated herein by reference:

• “Compensation Discussion and Analysis”
• “Compensation of Executive Officers and Directors”
• “Compensation and Organization Committee Report”
• “The Board of Directors and Its Committees — Oversight of Compensation Related Risks”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item will be set forth in the section captioned “Ownership of KeyCorp Equity Securities” contained in the 2021 Proxy Statement, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be set forth in the following sections of the 2021 Proxy Statement and these sections are incorporated herein by reference:
• “The Board of Directors and Its Committees — Director Independence”
• “The Board of Directors and Its Committees — Related Party Transactions”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be set forth in the sections captioned “Audit Matters — Ernst & Young’s Fees” and “Audit Matters — Pre-Approval Policies and Procedures” contained in the 2021 Proxy Statement, and is incorporated herein by reference.
PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) (1) Financial Statements
The following financial statements of KeyCorp and its subsidiaries, and the auditor’s report thereon are filed as part of this report under Item 8. Financial Statements and Supplementary Data:
Page Number



184

(a) (2) Financial Statement Schedules
All financial statement schedules for KeyCorp and its subsidiaries have been included in this Form 10-K in the consolidated financial statements or the related footnotes, or they are either inapplicable or not required.
185

(a) (3) Exhibits*
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
186

10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
187

10.40
10.41
10.42
10.43
10.44
10.45
21
23
24
31.1
31.2
32.1
32.2
101 The following materials from KeyCorp’s Form 10-K Report for the year ended December 31, 2019, formatted in inline XBRL: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income and Consolidated Statements of Comprehensive Income; (iii) the Consolidated Statements of Changes in Equity; (iv) the Consolidated Statements of Cash Flows; and (v) the Notes to Consolidated Financial Statements.
104 The cover page from KeyCorp’s Form 10-K for the year ended December 31, 2020, formatted in inline XBRL (contained in Exhibit 101).
* Incorporated by reference. Copies of these Exhibits have been filed with the SEC. Exhibits that are not incorporated by reference are filed with this report. Shareholders may obtain a copy of any exhibit, upon payment of reproduction costs, by writing KeyCorp Investor Relations, 127 Public Square, Mail Code OH-01-27-0737, Cleveland, OH 44114-1306.

† Certain schedules to this agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K and KeyCorp agrees to furnish supplementally to the SEC a copy of any omitted schedule upon request.
KeyCorp hereby agrees to furnish the SEC upon request, copies of instruments, including indentures, which define the rights of long-term debt security holders. All documents listed as Exhibits 10.1 through 10.44 constitute management contracts or compensatory plans or arrangements.
ITEM 16. FORM 10-K SUMMARY
Not applicable.

188

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the date indicated.
KEYCORP
/s/ Donald R. Kimble
Donald R. Kimble
Chief Financial Officer (Principal Financial Officer)
February 22, 2021
/s/ Douglas M. Schosser
Douglas M. Schosser
Chief Accounting Officer (Principal Accounting Officer)
February 22, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature Title
*Christopher M. Gorman Chairman, Chief Executive Officer and President
(Principal Executive Officer), and Director
*Donald R. Kimble Chief Financial Officer (Principal Financial Officer)
*Douglas M. Schosser Chief Accounting Officer (Principal Accounting Officer)
*Bruce D. Broussard Director
*Gary M. Crosby
Director
*Alexander M. Cutler Director
*H. James Dallas Director
*Elizabeth R. Gile Director
*Ruth Ann M. Gillis Director
*Robin N. Hayes Director
*Carlton L. Highsmith Director
*Richard J. Hipple Director
*Kristen L. Manos Director
*Devina A. Rankin Director
*Barbara R. Snyder Director
*Todd J. Vasos Director
*David K. Wilson Director
/s/ Carrie Benedict
* By Carrie Benedict, attorney-in-fact
February 22, 2021
189